What can be done about the myth that the Federal government only has limits amounts of money

Great Debates
61

You’re right. It would be correct, but for the Fed.

If we ran out of Treasuries (the government paid them all off) the people would be about $15 trillion poorer (I don’t know where we’d get all that money, since the total amount of money in bank deposits is only around ten trillion, but whatever), the Fed could continue to print money by buying private securities. Of course, assuming the Fed were buying at market prices, that would have a net-zero effect on private wealth. There would be more dollars, and fewer - I don’t know - corporate bonds. Or mortgage bonds.

But if the public was trying to net-save (spend less than it makes) taking away private savings vehicles wouldn’t help.

The Fed is also taking away savings vehicles by buying Treasuries, but the difference is the Federal government - if it’s good policy - can always print more Treasuries. It’s not constrained, the way a private business is.

It can also buy back Treasuries (directly or indirectly from the Fed) if it chooses to tax more than it spends. Which makes both the money it spends buying the Treasuries, and the Treasuries themselves, disappear, simultaneously.

Taking away the role of the Fed for a moment (which does make everything more complicated, though not fundamentally different) when the government taxes more than it spends, it takes financial wealth away for the private sector. When it spends more than it taxes, it puts financial wealth (Treasury bonds, for example, or just plain cash, if the central bank is buying the bonds) into the private sector.

You’re right that if your economy has lots of problems - if it’s not running at full capacity because of (for example) corruption; poor or non-existent infrastructure, or an illiterate or otherwise unskilled workforce, just printing money isn’t going to solve those problems.

But there are countries, like the US, where the constraint on the economy is none of those things. Instead, it’s lack of demand. It’s people attempting to save more than their income. In that specifics situation, the solution is to print more money, or more near-money savings vehicles, like Treasury bonds. In the best of all worlds (assuming you have a central bank) you’d do both. You tax less, spend more, print Treasuries, and then the Central bank would buy the Treasuries. (Or at least some of them.)

The end result would be that you would satisfy people’s demand for financial savings, so they would spend more, putting more people to work, which would result in the production of real wealth. (Employed people producing goods and services.)

Banks meet payrolls out of the profits they make selling loans. If banks didn’t spend the profits they get from making loans - by meeting payrolls, or paying shareholders, or building tall buildings or whatever, the economy wouldn’t work. But anyway, banks make meet payroll out of profits, not by creating new money.

I understand that: in macroeconomics savings is the same as investment (in a closed economy, such as the world as a whole.) It is not what ordinary people consider saving: spending less than you make. In fact, in a country without international trade, or one with with a balanced trade (X=M) there is no “saving” in the sense of people having spending less than they make, because by definition everything must be spent to be earned, and therefore all spending must be classified (more or less arbitrarily) as “consumption” (immediate) or investment (something that will last a long time).

Yet we do have a trade deficit, and have had one for a long time. The trade deficit consists of other countries accumulating dollars, while we accumulate stuff from their countries. That means, according to the equation, our savings are negative, have been negative for a long time, and will - presumably - will continue to be negative for some indefinite time in the future.

Now there’s something that bothers me here, and maybe you can explain it. Our negative savings rate is the accumulation of dollars by others countries - which also represents their savings rate. But the accummulation of dollars isn’t savings in macroeconomics, right? Savings = investment, right? And investment isn’t spending less than you make, it’s making things that last a long time. So if, for example, China, or any country, is accumulating dollars for the sake of accumulating dollars, doesn’t that mean they’re not investing?

In other words, if you’re going to define savings as spending money (on things that last a long time), but then define savings as accumulating dollars (not spending them) in another part of the same equation, isn’t that self-inconsistent? What am I missing?

Have to stop for now. Will try to respond more later.

62

Don’t.

Save it for later. Don’t write it now, or if you write it down, keep it in a Word document for later.

Every third sentence in your post is not correct. We don’t need you to add to that. Rather than keep building on your wonderful story that you’re so pleased to preach to everyone else, how about you just STOP right now and give yourself a chance to digest what’s actually been said, instead of what you imagine has been said.

One idea at a time. Not any more or less. One at a time. Here is your sentence, with my response.

I’m working with the literal statement there. That’s what I have to work with.

The literal statement is wrong. Just because the government is running a surplus does not mean that dollars are disappearing. Don’t respond yet, don’t break my post into pieces. Read the whole thing first, then respond afterward.

A government surplus is when the government taxes more than it spends. Suppose the government spends 3.5 trillion dollars, and taxes 3.6 trillion dollars. That is a surplus. That means that over the course of the year, 100 billion dollars more went into the Treasury from taxation than went out of the Treasury for spending. So if the Treasury did absolutely nothing else, then there would be just 100 billion dollars sitting there, doing nothing.

But they don’t have to do that. Even without a central bank, they don’t have to do that. We could be talking about gold dollars, or silver dollars, or cow chip dollars, or whatever. A surplus is more money going into the Treasury from taxes than is leaving from spending. You said “dollars are disappearing”. I responded that that’s not true. Money in the Treasury doesn’t have to stay in the Treasury. For example, they can buy back debt. They can buy back 100 billion dollars of debt in order to retire that debt. Money in the Treasury does not have to stay in the Treasury.

3.6 trillion goes into the Treasury from taxes. 3.5 trillion goes out of the Treasury from spending. That is a surplus. The remaining 0.1 trillion goes out of the Treasury to buy back bonds. Money in the Treasury does not have to stay in the Treasury, exactly as I said.

Now here is your bewildering response that makes no sense.

The Fed has nothing to do with anything so far. The government could, and in the 19th century actually did, buy back outstanding debt with their budget surplus when there was no central bank at all.

Your statement, the literal meaning, was not correct. It would not be correct even without the Fed, because the US actually saw that happen. It’s just plain wrong.

You are free to clarify what you meant, and that’s fine. But the literal statement, as written, is not correct. The literal statement is what I have to work with.

I’m going to do one more sentence fragment.

Nobody is talking about running out of Treasuries.

The statement from Measure for Measure in Post #2 was about a simple surplus, not about paying back the entire debt. With a surplus of 100 billion a year, for instance, it would take more than a century to “run out” of Treasuries. That’s not the issue.

I’ll move on to the next sentence when this point is clear.

63

I’m going to do one more example. This is the real disease.

This is from a recent thread:

You preach about bank accounting, but you’d never opened an accounting book in your life, not even the most basic intro text. This was not five years ago. This was not the distant past. This was last month. This was September. Next is one more sentence from this thread. “But anyway, banks make meet payroll out of profits, not by creating new money.”

This is, of course, completely wrong. You might as well be wearing your underpants on your head.

In the previous thread, I advised you to finally read an accounting book before you started talking about accounting.

We can see now that you didn’t take my advice.

The first most obvious point is that unprofitable banks cannot pay their payroll “out of profits” because they haven’t got any. This might be an established bank having a bad month, or a new bank just starting operations which means it has significant upfront expenses without yet having a lot of revenue. Regardless, they still have their payroll to meet. It can’t come out of profit if those profits don’t exist. More than that, even in the more ideal situation that payroll comes “out of profits”, it will still be the case that a bank meeting payroll is creating money.

I’m going to write that again: Even if the bank pays its salaries “out of profits”, the bank will still be creating money.

We can look at accounting videos or articles that explain the process. They’ll explain the process in a lot of depth, including the various accounts to be debited and credited for taxation, or external payroll services. We really don’t need all that detail for our purposes, but it’s useful to see at least once in your life. We can see this article from the same online accounting textbook that you didn’t bother to read. We want to get the JOURNAL ENTRY FOR PAYROLL (easy to find with your browser’s search function). Ignoring all the taxes for simplicity, we get:

DEBIT Salaries ExpenseCREDIT CashA normal company meets its expense by crediting “cash”, thereby reducing the amount of cash they have available. But we have to remember that this is the accountant’s definition of cash:

Checking accounts are included in this accountant’s definition.

What a normal company is doing is debiting its salaries expense, and crediting cash. They cut a check for payroll, and they reduce their checking account balance (“cash”) by the amount of the check. A normal company loses their cash asset by crediting their cash. But a bank is obviously different from a normal company. A bank doesn’t need to keep a bank account at another bank to meet payroll or other expenses. They’re not going to bother with that sort of bullshit. A bank is going to do this:

DEBIT Salaries ExpenseCREDIT Deposit LiabilitiesA bank doesn’t cut a check by decreasing their asset at a different bank. A bank cuts a check by increasing their deposit liabilities. This is in exactly the same way that a bank can buy a security, or issue a new loan, by increasing their deposit liabilities. By definition, a bank’s deposit liabilities are a form of money included in the M1. This means that a bank meeting payroll is creating money. That is the meaning of the ledger entry. It will the same ledger entry regardless of whether the bank is meeting payroll “out of profits” or not. Profits have nothing to do with anything. Sure, every bank would like its revenues to be sufficient to meet its expenses, but that doesn’t always happen. It’s the same ledger entry regardless of how good a month they’re having.

I’ve alluded to this process before.

And this is still a single snapshot. A ledger entry is a snapshot. It’s only the beginning. If in ten or fifteen years you finally bother to learn about bookkeeping before you shoot your damn mouth off, you still won’t be done. The actual interesting part of money is not the creation of the new deposit liability, but what happens next.

64

Hellestal - thanks for correcting my formulas upthread. I had blurred 2 different presentations of them (one with government, one without) and ended up with a mess.

I am on board with that. I post in physics threads, a subject I did not take in college. I try to defer to those who know more than me, but I understand that my discussion will invariably be mangled. At my best, I confine my comments to questions.

Well used textbooks are dirt cheap, so my recommendation holds (time and concentration, however, are more expensive). Mankiw is a fine mainstream writer, but his macro text was intended to provide an American conservative take on the subject. It emphasizes Keynesian stuff less, which is ok: Mankiw is not a nut. But there’s nothing stopping you from picking up a couple of extra macro texts: they will be easier reading (or skimming!) since you’ve already read one take on the subject. I’m guessing that another presentation might make the distinctions between monetary and fiscal policy clearer in your mind.

The best macro-economists are able to understand the economy using multiple mainstream frameworks simultaneously. I tend to think of monetary policy as the manipulation of short term interest rates, with money creation being a sideshow. That’s a tendency I’m confessing to, not advocating. Surely examination of the flow of credit is advisable.

Also: You know the politics of MMT right? If monetary policy if fully effective, there’s no need for fiscal policy, no independent justification for a large federal government. Now personally I think that it would be a boon for mankind if they turned out to be correct. But some pin ideological hopes on this outcome, which is something to be aware of: sound thinkers need to be cognizant of their biases and tendencies.

I can’t see this. Admittedly, I’m more familiar with college-level presentations of a bank’s balance sheet than its income statement. (Translation: I’ve never seen a bank income statement.) I believe I understand how a bank loan results in the creation of money. But I’m hitting a block here. It seems to me that paying salary would result in a dollar reduction in the Bank’s internal account for every dollar increase in Joe Employee’s checking account. Contrast with a loan or purchase of a security, whereby ninety cents of a deposit liability is loaned out, thereby creating a new deposit liability.

That said, while I’ve taken introductory accounting some time back, I know that bank accounting is something that requires special study. So serious question: are you sure that bank salaries create money? Because that’s the sort of striking result that I would think I might have heard about. FWIW, I couldn’t find reference to that in Mishkin’s textbook.

65

It’s worth pointing out that fiscal policy relies to some extent on monetary principles like the money multiplier to have the maximum impact and the delay we see when fiscal policy is used can be attributed in large part to the fact that the multiplier effect is not instantaneous. In addition, if the multiplier happens to be low, as it was when fiscal measures were applied last year and money velocity also happens to be low, that can negatively impact the effect of fiscal policy.

66

I’m not quite sure where you’re getting hung up. This is merely a matter of definition.

Definition 1: The M1 stock of money is defined as “The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits”.

Definition 2: Demand deposits are liabilities of private banks. That is to say, they sit as credits in the liabilities column of bank ledgers. (This will be easier to understand if you know the basics of accounting.)

The whole point of accounting is to keep track of things. When a company pays for something such as a new computer for the manager’s office, they’re going to record that transaction in their books. The computer is a new asset for the business, and that asset will sit as a debit in the assets column on their books. It’s double-entry accounting, so along with the debit, they’re going to credit what they used to pay for that computer. A normal company will record the transaction with a set of ledger entries. I’m probably getting the names of the accounts somewhat wrong, but it basically works like this:

DEBIT New computer assetCREDIT CashWe have to remember that this “cash” is the accounting definition, which includes the company’s checking account balance. This entry says they’re increasing their computer assets, and decreasing their “cash” (checking account) assets.

There’s a huge difference between a normal company and a bank when they’re paying for things. That difference is that we all use the bank’s liabilities as our money. When I think about how much money I have, I don’t just count the currency stuffed into my sock drawer. I think about my bank account balance, and that balance is a liability of a private (commercial) bank. My asset is their liability. That means that when banks cut a check to pay for anything, their ledger entry is going to be different. When the bank manager needs a new computer for their office, it looks like this:

DEBIT New computer assetCREDIT Deposit LiabilityIn other words: the bank puts itself into debt to cut a check to buy the computer. That’s what deposit liabilities are: debt owed by the bank. And as it turns out, this is what banks do to purchase pretty much everything. They don’t draw down their monetary assets like other companies. Instead, they increase their monetary liabilities because that is the very nature of their business. It’s how they pay for everything. They put themselves in debt, which is the same thing as saying they increase the numbers in somebody’s checking account.

If you want to have some fun, go on over to fdic.gov and mouse over the top where it says deposit insurance. One of the choices will be BANK FIND, and you can enter your own bank’s information. First click on the latest financial information. Then you’re looking for the “Call Report”. It’ll be a pdf. The first statement will be the income statement, followed by the balance sheet.

DEBIT New loan assetCREDIT Deposit Liability

Ninety cents has nothing to do with anything.

The deposit liability is created simultaneously with the loan.

Let’s say I own my house outright and I decide to sell it. I’m going to put it on the market for a nice round 100,000. A buyer shows up, and they take out a loan for the full amount. They happen to take out a loan at my very bank. So now the bank has a new loan on their books, and instead of actually printing up a check for me, they just tell me they’re going to deposit it in my account.

DEBIT New loan assetCREDIT Deposit Liability (Hellestal’s Checking Account)And bam. New money was created. That’s it. It’s as simple as that. And because my account is with this bank, the process stops there. I’m not going to deposit the check at another bank. I’m also (probably) not going to cash out my account to stick the Franklins in my sock drawer.

The bank has regulatory requirements. They created 100,000 of new deposit liabilities, so they might now have a reserve requirement of 10,000 dollars of cash. (Real cash this time: central bank money.) But reserves are easy to find, now more so than ever. We discussed this in one of the OP’s previous threads.

You can see plain as day above. Regulations can be difficult, but the definitions are very easy.

Mishkin’s book is pretty good, but this is not the sort of thing that monetary economists typically discuss. This is, in fact, why LinusK thinks his pet theory is such a revelation: It starts with basic truths of accounting, matters of definition, and it treats them more or less correctly in a way that a typical economist would not. (I’ll assume for charity that the rest of the MMT people actually know how accounting works, and that he is not representative of them.) It’s like finding some deep secret that no one else knows about, that special tingle of the “insider’s knowledge” that makes people feel big in their britches. Then they extrapolate from those definitions in ways that quite often make no sense.

It’s very much like Austrian Theory, in fact. It’s a mishmash of true observations with petty ideology that requires some intellectual effort on the part of the reader. After they’ve put in that effort, they have the overwhelming need to believe that what they just strained themselves to understand has real Truth to it. The cognitive dissonance would be too much if they bothered to learn this magnificent system that happened to be wrong.

I have the same psychological tendencies myself, which is why I try to read as many viewpoints as I can. It’s a way to avoid the trap of reasoning ourselves into nonsense.

67

I disagree with the OP’s conclusion. Increasing the money supply is fine. Increasing the money supply *by constantly going deeper into debt *is foolish.

68

One doesn’t necessarily imply the other although a larger economy implies more economic activity on average over the course of the business cycle and therefore, on average, a larger money supply.

However the idea that increases in the debt mean a larger money supply is tied to the idea of monetization. That’s the idea that you finance the debt by printing more money. Specifically, the Treasury would issue more debt which would eventually be bought by the Federal Reserve with money they would create ab nihilo, from nothing. IIRC, the fed currently owns about a third of long term debt of the US but I think almost all of that has been purchased over the course of the past 4-5 years as part of the various liquidity programs lumped under the rubric of quantitative easing. All of the money has gone to create bank reserves and eventually those securities will be sold back into the market to reduce those reserves to pre-crisis levels.

However if the intention were to hold those securities or buy the bulk of newly issued debt with printed dollars, that would qualify as monetization.

69

Yes, debt is a creation of the Federal government when it spend more than it owns. The money supply is a result of an interaction between the central bank’s purchases and sales of bonds and the private banking system. Debt creation and money supply growth are best considered separately, especially given the institutional independence of the Federal Reserve, such as it is.

You are assuming that Dell (the computer company) is a customer of the bank, right? I think that was the source of my confusion. It’s a fine assumption as you can just tweak it to consider the banking system as a whole (Dell is surely the customer of some bank: they don’t keep the cash in a mattress). I shoulda figured that out, admittedly.

Otherwise, I’m still confused. Thanks for revisiting the material: it helped to go through it again. When I get around to it, I think I’ll go over to a non-money center bank website, download the annual report and compare & contrast it to a nonbank business like, say, the Gap, Pfizer or whomever. Two pdfs side by side.

70

If it makes it easier, sure. But they don’t have to have a permanent account for a check to be made out to them. If the bank is doing a one-time purchase, they can record that as a one-time transaction in a temporary account. A temporary checkable deposit account is like a traveller’s check – when it’s deposited, it’s gone, with no long-term commitment to that particular bank – but it’s still a check and that liability for the check is still a checkable deposit. The check is, after all, going to the computer store. They won’t sit on that check. It can and almost certainly will be deposited somewhere, at some bank, very quickly.

So they just write up a temp account for that check, and they’re gravy. Completely normal.

Precisely. In this case, there will be an additional ledger entry to finish the process. The first entry will be recording the moment when they cut the check to pay for the computer:

DEBIT New Computer AssetCREDIT Deposit Liability (Temporary account drawn on the bank itself, sorta kinda similar to accounts payable for a normal company except still a deposit liability for the bank since the account was created to cut the check to pay for the computer, and the check will likely be deposited quickly)

Then there will be a second entry recorded when this check is deposited at another bank. That check is a deposit liability, and eventually the computer store’s bank will come calling for their money. The debit indicates that their temporary liability for the computer has been called in. It was resolved by drawing down their cash reserves to transfer to the other bank. The temporary liability is gone, and the reserves are gone, too, in order to pay for it.

DEBIT Deposit Liability (Temporary account)CREDIT ReservesThe other bank’s books, not shown here, will indicate an increase in their own cash reserves and a simultaneous increase in the account of the computer store which deposited the check. Or the computer company can pull the cash out of the system entirely, and thus destroy that deposit liability instead of transferring it to a new bank in the system. That’s why I’ve been trying to hammer home, since my first post in this thread, that all these entries are mere snapshots, frozen instances of time, and they don’t tell the complete story.

There are more interesting wrinkles to this. Paying interest to your bank destroys money. The bank paying for just about any expense at all, not just payroll but dividends or practically anything else, creates money. You’ve no doubt seen the circular flow of funds diagram in the beginning of macro textbooks, but I actually have a simple Mathematica program on my computer (which comes from a Post-Keynesian “heterodox” economist, in fact) that simulates that flow of funds from firms to households and banks, from households to firms, and from banks to firms and households. I’ve been told that it’s slightly similar in spirit to simple models for the carbon cycle.

The problem with a model like that, from the perspective of a more conventional economist, would be too many agents. A proper Nash equilibrium with optimizing agents leading to a general equilibrium of all markets, would be completely fucking impossible.

So a conventional macroeconomist will abstract away from all that in their models. It’s this first intro level of abstraction that you’re looking at when you open up Mankiw or Mishkin. I can link to several different posts by Paul Krugman where he tries to point out the “non-specialness” of banks as a justification for that abstraction. Critics would say it’s a rationalization, and they’d point to the unrealistic assumptions behind the models of “modern macro” as their own justification. Modern macro uses a single representative agent for the whole economy, with intertemporal maximization in a fashion no human mind can do, with unreasonably “rational” expectations to keep the math tractable, and for the same reason eventually assuming a steady state and then linearizing on that steady state in order to get results out of the model. I think there’s some genuinely useful things that can come out of this, but only in a limited way. A broad perspective is needed. The problem is that this is what grad students cut their teeth on, and it’s complicated enough to demand their full attention so they don’t really get any broader view of things. This leads to rather terrible mistakes later on.

There are things inside our heads that we can’t properly communicate, maybe because the methodology of modern macro itself is too constricting. That’s what it looks like to me, anyway.

I can imagine what the mess looks like to other people who haven’t had any grad training at all. When a heterodox approach shows up that treats the basic facts of banking more or less accurately in a way those abstract models don’t, it’s a breath of fresh air to some people. Well and good, I guess, at least until they start making mistakes of their own.

A few comments on one of your previous posts:

If you’re going to think in terms of interest rates, it’s absolutely necessary to think about the future expected path of interest rates. This might be the single key fact that most people, even most economists, don’t figure into their thinking. It’s not just monetary policy today, but expected policy out into the future that’s essential to consider.

Just so we’re clear, the MMT that’s from the OP is Modern Monetary Theory. This is a form of super fiscalism, advocating budget deficits pretty much perpetually. It’s the various forms of monetarism, a different thing entirely, that advocate only monetary policy. I started this Great Recession a pretty conventional Keynesian, but events and arguments pushed me into one of the new breeds of monetarists.

And you seemed to mean this with your comment, but I want to emphasize that there’s no necessary connection between Keynesian policies and the size of government. European governments are quite large, but they’re pushing through austerity programs right now, or at least trying to. The Australian government is fairly small in comparison, but they still did a fiscal stimulus. As long as governments save in a boom, and spend more in a bust, they’re Keynesian, regardless of what size the government is. There is, obviously, a lot of affinity between large-government thinking in the US and Keynesian thinking, and likewise with small-government thinking and monetarism, but it’s not a perfect overlap.

71

Thanks again. I hadn’t thought about a bank’s non-loan processes before I opened this thread. And the snapshot point is illuminating.

The financial crisis has been liberating in a way; suddenly perfect market assumptions don’t seem necessarily like the appropriate ones to work with by default. Which means that all sorts of issues get revisited.

Ok, but the term structure of interest rates reflects all that, right? Well, no: not necessarily, at least not entirely: financial markets are weird. Look at the foot dragging after the Fed’s change in policy in October 1979, arguably lasting over a decade.

Thinking hard about expectations is a good idea, particularly when conventional monetary policy is maxed out and that’s (almost) all you have to work with. But I think the idea that a new Fed chair can set policy with 100% credibility has been falsified by the US’s and Britain’s experiences with tightening during the early 1980s: we couldn’t adjust inflation without undergoing recession.

Hot money: As I said in an earlier thread, I’m much more inclined to believe financial market responses to Fed announcements than main street ones. But an article in the NYT gave me pause: they discussed how higher inflation might be a good thing (and implicitly why very low inflation is a bad thing). Rogoff of all people provided the most dovish comments, calling for 6% inflation for a couple of years. Now something like that just might come to the attention of those planning capital investment. But the effects of discussions of tapering QE3 seem to me to be captured fully by looking at investment elasticities to subsequent-change-in-long term rates. i.e. I’m guessing the real world effects are small. (The shutdown would be another matter.) I’d like to see some empirical work though: my WAGs don’t cut it.

Woops, I thought we were in Scott Sumner’s world. :smack: LinusK: I retract my earlier political observations.

Agreed, it’s an ideological connection, one that isn’t universal. Conservative governments often adopt Keynesianism once they attain power, sometimes fairly explicitly.

72

That’s funny, because I would point to the US experience as a success in that respect.

The recession resulted because the labor markets don’t adjust expectations as fast as the financial markets. What I’m doing is segmenting the two sectors: the financial markets were quickly convinced of the credibility of the policy, even as the labor market lagged behind. Credit wouldn’t have gotten so swiftly choked away, causing the recession, if bankers hadn’t been totally convinced that Volcker was telling the truth. The early tightening under Carter, before the election, is a big difference from the one under Reagan. The earlier tightening just wasn’t as sincere and it showed. When the crunch happened, it really happened. Labor negotiations lagged behind, sure, but the labor market is kind of its own world.

That would be one of my threads.

I’m a thorough Sumnerite now, with respect to business cycle theory. I could quibble about things at the edges, but that’s always the case.

Absolutely.

A weird thing from my personal perspective is that I’ve become a lot more sympathetic to more small-government arguments since I become more monetarist. Totally bizarre. There is an ideological component at work here, not a perfect one but it does exist, and I’m as affected as anyone else. I still hold large swathes of the current GOP in Congress in contempt, but I Miss Republicans and I can see myself listening to them more carefully in the future if the day ever came when they weren’t completely insane at the national level.

73

More detailed study (a la Temin or Eichengreen) might be nice. But IIRC long term rates Treasury rates stayed too high for too long to be consistent with reasonable expectations (adaptive expectations are another story).

I’m not sure what you mean about early tightening: it seems to me that running the political business cycle in reverse is a pretty credible action. Still, here’s the fed funds rate series:



date	Fed Funds  Change
Dec-78	10.03	
Jan-79	10.07	0.04
Feb-79	10.06	-0.01
Mar-79	10.09	0.03
Apr-79	10.01	-0.08
May-79	10.24	0.23
Jun-79	10.29	0.05
Jul-79	10.47	0.18
Aug-79	10.94	0.47
Sep-79	11.43	0.49
Oct-79	13.77	2.34
Nov-79	13.18	-0.59
Dec-79	13.78	0.6
Jan-80	13.82	0.04
Feb-80	14.13	0.31
Mar-80	17.19	3.06
Apr-80	17.61	0.42
May-80	10.98	-6.63
Jun-80	9.47	-1.51
Jul-80	9.03	-0.44
Aug-80	9.61	0.58
Sep-80	10.87	1.26
Oct-80	12.81	1.94
Nov-80	15.85	3.04
Dec-80	18.9	3.05
Jan-81	19.08	0.18
Feb-81	15.93	-3.15
Mar-81	14.7	-1.23
Apr-81	15.72	1.02
May-81	18.52	2.8
Jun-81	19.1	0.58
Jul-81	19.04	-0.06
Aug-81	17.82	-1.22
Sep-81	15.87	-1.95
Oct-81	15.08	-0.79
Nov-81	13.31	-1.77
Dec-81	12.37	-0.94
Jan-82	13.22	0.85
Feb-82	14.78	1.56
Mar-82	14.68	-0.1
Apr-82	14.94	0.26
May-82	14.45	-0.49
Jun-82	14.15	-0.3
Jul-82	12.59	-1.56
Aug-82	10.12	-2.47
Sep-82	10.31	0.19
Oct-82	9.71	-0.6
Nov-82	9.2	-0.51
Dec-82	8.95	-0.25

The Fed funds bopped around a lot, partly because they were targetting M1 at the time and not interest rates. But an increase of 2.34% in October is pretty significant: recall that Greenspan limited his interest rate increases to 0.25% following the early 1990s recession. But looking at the series I concede that there appeared to be some reversals during the election year summer of 1980. Still, I think it’s fair to say that the idea that you can make a credible statement about economic policy and the economy (including labor) would magically adjust has been falsified. That’s an entirely separate argument from one that considers multi-sectoral expectations.

Those guys were kicked to the curb in 1980. They peaked around 1960. In an alternative universe, I would be one of them. The main argument against that POV is that sometimes you have to make a big leap. If the status quo is demonstrably bad and downside risks are managed, you can prudently make big changes even if you don’t really understand all the policy issues sufficiently. This doesn’t occur often, but I would say it was the case of the New Deal, the Affordable Care Act and unconventional monetary policy.

Anyway, the GOP had a lock on the professional class in 1960. Since 1964 though that class has trended Democratic.

74

Well, here’s a link to the US monetary base. It’s gone from approximately $800 billion in 2008 to just under $3.6 trillion now. That’s more than a four-fold increase. It’s had approximately 0 effect on the value of the US currency. The yen is worth about the same as it was in 2008. The euro, on the other hand, has fallen, from about 1.6 to 1.4.

So you don’t have to imagine it. It’s been done.

75

I see you’ve avoided answering the question though. You’ve also chosen the only money supply metric that includes Fed bank reserves, i.e., MB (monetary base). And as I have pointed out to you in other threads several times before, money in bank reserves is invisible to the economy unless and until banks use that money to satisfy reserves requirements for making new loans.

However if the fed re-absorbs that excess reserve overhang before it can be the basis for money creation in the economy, it has no effect on inflation. This is not something that was widely understood at first but it is now.

There is also the position of the USD as a reserve currency that confounds matters. Confounders are also an issue with your other examples, especially Japan.

The point here is that even though I posed this question almost 2 weeks ago, you still seem to have no idea how to answer it.

76

That’s exactly right. The government is +$100 billion. The public (everybody else) is -$100 billion. If the government keeps that money (“saves” it) it is exactly the same as if it’d shredded it. It’s gone. Now, if in the future, it spends its spends its “savings,” then it puts the money back into the economy. Suppose, hypothetically, the government had a giant building, where it hoarded its $100 billion in currency (think Fort, Knox, but with bales of currency). Now suppose some smart person came along and said, “You know what? Keeping this giant building secure and mouse-proof and guarding it is costing us a lot of money. Let’s haul all the currency out, burn it and then sell the warehouse to someone who can use it for something productive. After all, we’re the government. We can always just print up a new $100 billion when, or if, we need it.” What difference would it make?

Of course not. The government can create money (spend more than it taxes) as easily as it can destroy it (tax more than it spends). What you seem to be saying is that the money is still there if it’s in a big warehouse somewhere. What I’m saying is whether it’s sitting in a warehouse or been shredded doesn’t matter. All that matters is whether there’s a surplus or a deficit. Whether the money is “there” in a warehouse makes no difference.

When the government buys back bonds, using a tax surplus, the amount of money stays the same. However, something does change: the dollar amount of bonds outstanding. $100 billion in bonds disappear - and I mean that literally. When a treasury bond is paid off, it disappears - same as any other debt. In that case the public has the same amount of money as it had before (the government spent the surplus on bonds) but it has $100 billion less in Treasury bonds. Its net financial balance has decreased by $100 billion - the same as the surplus. The government’s financial balance, on the other hand, has improved by the same amount.

77

It’s because of statements like that show that you don’t actually understand much of anything when it comes to monetary theory.

While loans do create a multiplier effect and that effect results in money creation, deficit spending per se is not money creation in the sense that anyone would normally use the term. So you end up confusing this with money that actually is created from nothing, ab nihilo by the fed when the 2 couldn’t possibly be more different.

What I can’t tell is if you’re genuinely confused and trying to understand or if you have some agenda that is influencing your understanding. I’ve already recommended an excellent article on how bank reserves are handled from an accting point of view. It’s 15 pages but should be penetrable w/o any particular technical background. This covers a lot of these in passing, such as the multiplier and is the sort of unbiased material I would recommend spending some time with.

78

Wearing my underpants on my head? That is embarrassing. Profits are what’s left over after you meet payroll (and other expenses). At least that’s how I thought it worked.

No. As it is, I barely have time to keep up with this tread. I am self-employed, though, and pay an assistant, so I thought I thought I had a grasp on the relationship between profits and expenses.

Banks do however have a bank account with another bank: the Fed. And if their employees all keep their paychecks at their own bank, and don’t spend any money, that’s fine. If they spend down their balances, however, or deposit their checks at other banks, then the reserve balance at the Fed is going to decline. If it declines too much, the bank will have to borrow money to make payroll - or to pay whatever expenses they have.

Banks, in other words, can create liabilities on themselves willy-nilly, but a bank can’t pay another bank, or anyone with an account at another bank, with its own liabilities. It must pay through the Fed system.

So I guess what I’m saying is: if the bank pays somebody just by crediting his account at the bank, the bank is creating money. It’s creating a new liability on itself. That liability will reduce its profits, however, by the same amount as the payroll check. The money that goes to the employees s money that doesn’t go to the shareholders. Do you disagree with me about that? There is a 1:1 correlation, right? A dollar that goes to an employee is a dollar that doesn’t go to shareholders.

If the bank is losing money, however, and its employees are spending their paychecks, then that means its account at the Fed will go down. If it goes down far enough, the bank will either need to borrow money (from the Fed or from other banks) to replenish it, or the Fed will shut it down. A paycheck is an expense. There’s no asset on the other side of the ledger, unlike a loan.

79

You said:

MB, I believe, stands for monetary base. You’re suggesting, I think, that “doubling” its “nominal value” would devalue the dollar. Yet it’s more than quadrupled in the last few years, without affecting the value of the dollar. In fact, the dollar is worth more against the euro than it was then.

Now you’re saying it’s because the dollar is the world’s reserve currency, or because banks aren’t “using” the money, or because it’s unfair to compare it to the yen.

If you already knew all that, why did you issue the challenge in the first place?

80

Well, this is “great debates”. Until they decide you have to have a PhD in a subject, I’ll continue to post. Well, at least until I get bored, or Hellestal’s head explodes.

I think you’ve got that wrong, or backwards. As I understand it, they’re saying fiscal policy (government deficits or surpluses) is what matters. Well, that’s not quite right. A central bank allows a country to monetize its own debt, and eliminates the possibility of default. Both are extremely important functions. But a country could take over those functions, if it wanted to, by simply issuing dollars by spending them (when they’re too few) and destroying them by taxing them (when they’re too many).

By that calculus, what matters is not the number dollars, but the number in relation to a country’s productive capacity. If capacity is underutilized, the government needs to either reduce taxes or increase spending, or both. Ordinarily, full employment represents full capacity, so a country should deficit spend until it reaches full employment. The amount of deficit spending the country has done in the past is irrelevant. It represents no constraint whatsoever on how much the government can deficit spend now, or in the future. What matters is real resources, not units of currency the government can create or destroy at will. In other words, it’s skilled workers, oil or solar or other energy sources, efficiency and technology that matter. Deficits are a fake constraint, and worrying about deficits when there are people who are ready willing and able to work but are unemployed is like trying to make a ship go faster by reducing rations when half the rowers don’t have oars.

The debt is ultimately just an accounting entry. It represents the number of dollars (or in the case of the US, dollars + Treasury bonds) the government has issued to the private sector. Since we can’t run out of dollars and we can’t run out of Treasury bonds, what we should be worried about is unemployment and inflation, not deficits and debt.

Well, I do too, but MMT is far out of the mainstream, and there doesn’t seem to be any reason for that to change soon. You might be interested in this article. It’s a fun read. Galbraith teaches at the UT Austin, where I live. But at the LBJ School of Public Policy. Not even in economics.

From what I can tell, MMT is somewhere to the left of Keynesians, although they claim to be non-political. Anyway, they’re too leftie for Krugman, who’s pretty liberal himself.