Tapering called off

[Mdraf]

As you say the Greek metaphor does not apply so why use it?

I assume our government and every other currency issuing government in the world missed the MR memo that they don't need to tax at all ! 

A it would be a good idea to send the memo to the CBO as well. They don't seem to get it like you guys do.

http://www.bloomberg.com/news/2013-09-1 ... risis.html

[Gumby]

As you say the Greek metaphor does not apply so why use

Because the Greek metaphor is the only explanation that I could think of that could possibly explain what you're trying to say. And since it seems you don't plan on ever explaining your own logic, we may never know!

I assume our government and every other currency issuing government in the world missed the MR memo that they don't need to tax at all !

Not really. Taxes play a role — they legitimize the currency (you need it to stay out of jail) and taxes help create a psychological bond with the government that makes it feel less like a dictatorship — so you can say, "my taxes fund XYZ" (even though they really don't).

[Mdraf]

As you say the Greek metaphor does not apply so why use

Because the Greek metaphor is the only explanation that I could think of that could possibly explain what you're trying to say. And since it seems you don't plan on ever explaining your own logic, we may never know!

I assume our government and every other currency issuing government in the world missed the MR memo that they don't need to tax at all !

Not really. Taxes play a role. They legitimize the currency (you need it to stay out of jail) and taxes help create a psychological bond with the government that makes it feel less like a dictatorship — so you can say, "my taxes fund XYZ" (even though they really don't).

In another thread I listed several countries that are currency issuers that defaulted or whose currency crashed but was "explained" that each case was due to something else. Of course in this complex world one can do this ad infinitum.  Your explanation that taxes are necessary for some sort of psychological reason is a little bizarre, but suit yourself. 

As for why don't I explain myself, I just did. It can't be reduced to simpler terms than 2-2=0, and 2-4= -2

[Gumby]

In another thread I listed several countries that are currency issuers that defaulted or whose currency crashed but was "explained" that each case was due to something else.

Correct. They all had exogenous triggers. No modern currency issuer has ever defaulted for simply printing debt-based money under normal conditions. But, I have never said that a currency issuer can survive an extreme exogenous event (what government can?)

Your explanation that taxes are necessary for some sort of psychological reason is a little bizarre, but suit yourself.

At least I'll give you the courtesy of explaining my "bizarre" statements (wish you were able to do the same):

Consider the following perspective on Hitler's fiat 'Labor Treasury Certificates' that he used to build up the Nazi military during the '30s...

"Another cautionary note from the German experience is the consideration of how spending money that is not raised from the taxpayer effectively releases the government from it's obligations to the taxpayer. We can wonder if the German people would have gone along with Hitler if they had been bearing the full cost of the military buildup. These examples are extreme examples because of the degree of fiatization involved - virtually 100%."
Source: http://bobgreeninnes.hubpages.com/hub/H ... Fiat-Money

Think about that for a second. In a pure fiat monetary system, taxes don't actually fund anything (i.e. Hitler spent without taxing). But, perhaps taxes do play an important role in holding the government accountable to taxpayers who think they are funding the government? I can't prove it, but at least I explained my statement (wish you would do the same).

As for why don't I explain myself, I just did. It can't be reduced to simpler terms than 2-2=0, and 2-4= -2

It's a weak explanation considering that a currency issuer can still function with virtually no tax income (beyond what it needed to simply create demand for the currency). I really wish you could explain yourself with words. It would make your statements more believable. Please try.

[murphy_p_t]

I'm pretty sure this started before QE.

How does QE redistribute purchasing power? I thought that all it did was pump banking reserves into the system and possibly lower interest rates.....I don't think your average poor American feels like they have had anything redistributed to them.

The feelings of the poor have nothing to do with it. Please don't tell me you are denying when someone gets a government handout they haven't actually earned it. You and everyone else knows it was stolen from someone else.

Does QE create additional dollars every month?

Can those dollars be used to buy stuff?

Did the people who make those dollars earn them by producing anything of equal or greater value?

They have redistributed purchasing power away from everyone else with dollars.

They have used it to bid up prices of financial assets.

The owners of financial assets have benefited at the expense of those without.

Some are left with purchasing power they did not earn either through work or investment because the counterfeiting benefited them.

Imagine if instead of buying bonds the FED bought cars with it and gave the cars away. Is it obvious what would happen to car prices, car dealers, car manufacturers, everyone in the car business? Is it obvious that this would misallocate resources and screw the economy up by creating a car bubble? Same thing with the bond buying except that touches everything with the interest rates.

To believe printing slips of paper can improve our standard of living is to believe in magic. To believe counterfeiting is acceptable or sound economic policy is tragic.

+1

[murphy_p_t]

Not really. Taxes play a role — they legitimize the currency (you need it to stay out of jail) and taxes help create a psychological bond with the government that makes it feel less like a dictatorship — so you can say, "my taxes fund XYZ" (even though they really don't).

Is this the mindset of a budding totalitarian....or a casualty of Stockholm Syndrome?

[Gumby]

Does QE create additional dollars every month?

No. QE does not create any additional dollar-denominated financial assets in the private sector. The bank is no richer after a POMO transaction, period.

Imagine if instead of buying bonds the FED bought cars with it and gave the cars away.

Sorry, but it's a bad example considering that A) it's illegal for the Fed to buy non-financial assets and B) the Fed doesn't give anything away — it always removes an asset of equal value from the private sector. The Fed has no authority to make anyone in the private sector feel richer. Try again.

[moda0306]

Not really. Taxes play a role — they legitimize the currency (you need it to stay out of jail) and taxes help create a psychological bond with the government that makes it feel less like a dictatorship — so you can say, "my taxes fund XYZ" (even though they really don't).

Is this the mindset of a budding totalitarian....or a casualty of Stockholm Syndrome?

Is there anything more totalitarian about taxing to promote value of a fiat currency vs taxing to fund government?  Both are holding a gun to someone's head.

[moda0306]

I'm pretty sure this started before QE.

How does QE redistribute purchasing power? I thought that all it did was pump banking reserves into the system and possibly lower interest rates.....I don't think your average poor American feels like they have had anything redistributed to them.

The feelings of the poor have nothing to do with it. Please don't tell me you are denying when someone gets a government handout they haven't actually earned it. You and everyone else knows it was stolen from someone else.

Does QE create additional dollars every month?

Can those dollars be used to buy stuff?

Did the people who make those dollars earn them by producing anything of equal or greater value?

They have redistributed purchasing power away from everyone else with dollars.

They have used it to bid up prices of financial assets.

The owners of financial assets have benefited at the expense of those without.

Some are left with purchasing power they did not earn either through work or investment because the counterfeiting benefited them.

Imagine if instead of buying bonds the FED bought cars with it and gave the cars away. Is it obvious what would happen to car prices, car dealers, car manufacturers, everyone in the car business? Is it obvious that this would misallocate resources and screw the economy up by creating a car bubble? Same thing with the bond buying except that touches everything with the interest rates.

To believe printing slips of paper can improve our standard of living is to believe in magic. To believe counterfeiting is acceptable or sound economic policy is tragic.

Dollars alone are not the only purchasing power. Anything with nominal value on our balance sheets is purchasing power.

[Gumby]

When the assets are purchased from non-banks?  I suppose so, in that it is "easier" (mechanically speaking) to spend money that is in a checking account vs. a savings account.

It's irrelevant since the Fed is only allowed to swap financial assets with Primary Dealers. They don't have the authority to interact with anyone else.

The account holders at Primary Dealers don't notice a difference in their statements if their savings accounts are held as T-Bonds or excess reserves (besides a slightly lower interest rate when their accounts are held as reserves) so it makes no difference to them.

If anything, people wind up with less savings in their bank accounts with QE, since the private sector winds up with less interest income.

[Kshartle]

Guys it's cool really. We can't discuss this stuff here. We should avoid the topic of QE and it's effect on the economy. Heck we should avoid the actual economy and stick to Breaking Bad (a fine topic) or where to best store gold (another one).

This always turns into a discussion of whether or not a dollar is different from a bond or whether or not anything changes when a dollar is created by the FED and a bond is purchased.

How can you guys possibly think the bank having bonds on it's balance sheet is the same as cash?  The only thing it can buy with it's bonds is cash. (correct me if that's wrong please)

You might as well forget the bank. What QE is, in effect, is an interest free loan to the government.

Imagine a closed system, an island perhaps. I'm there, MDRAF, Gumby and some others. We all use the same paper money.

Further imagine MDRAF is married to a drunk who will not help him. He has 19 kids to feed. It costs him 4k per month for diapers and formula. He only make 2k per month working OT at a gas station. (Sorry MDRAF)

Gumby loans him the other 2k per month needed to get by. He receives a note that promises repayment with interest.

I have a counterfeiting machine. Every month I print 2k or slightly more and buy the note from Gumby. Now he is made whole and I have the note. I also have a side agreement with MDRAF that I will send all interest except a tiny portion back to him. The tiny fee is for my valuable service masking his "loan" which is really just expansion of the money supply to enable him to buy diapers and formula.

At the end of our story MDRAF is not paying interest on a loan, Gumby has as much money or possibly slightly more, MDRAF has 2k more which will be spent and bid up prices.  I also have slightly more from the fraction of interest.

Who is hurt by all this? *Hint* - it's not me and it's not MDRAF.

MDRAF is the government in this example and I am Ben Bernanke.

[Kshartle]

Dollars alone are not the only purchasing power. Anything with nominal value on our balance sheets is purchasing power.

What is nominal purchasing power? What is it measured in? What do you buy with non-dollar assets?

[Kshartle]

Imagine a closed system, an island perhaps. I'm there, MDRAF, Gumby and some others. We all use the same paper money.

Further imagine MDRAF is married to a drunk who will not help him. He has 19 kids to feed. It costs him 4k per month for diapers and formula. He only make 2k per month working OT at a gas station. (Sorry MDRAF)

Gumby loans him the other 2k per month needed to get by. He receives a note that promises repayment with interest.

I have a counterfeiting machine. Every month I print 2k or slightly more and buy the note from Gumby. Now he is made whole and I have the note. I also have a side agreement with MDRAF that I will send all interest except a tiny portion back to him. The tiny fee is for my valuable service masking his "loan" which is really just expansion of the money supply to enable him to buy diapers and formula.

At the end of our story MDRAF is not paying interest on a loan, Gumby has as much money or possibly slightly more, MDRAF has 2k more which will be spent and bid up prices.  I also have slightly more from the fraction of interest.

Who is hurt by all this? *Hint* - it's not me and it's not MDRAF.

MDRAF is the government in this example and I am Ben Bernanke.

How does Gumby have more money than had before?  Before, he had an IOU from MDRAF.  Now he has cash from you equal to the value of the IOU.  But, because you pushed the interest rate down, he has less money than he would have prior to your pushing the interest rate.

And MDRAF had the $2000 from Gumby prior to your getting involved.  How did your involvement change anything (besides lowering MDRAF's interest payments on future IOUs that he issues to Gumby by $1 per month)?

And, yes, you have that extra $1 per month in interest payment now.  Big freaking deal.  You can't actually buy anything like diapers or food with that money.

MDRAF has $2000 more than when we started. Gumby might have slightly more than when he started if I pay slightly more for the IOU than he did and I am receiving a tiny amount of interest that I didn't earn.

No one has actually earned anything or produed anything and yet there is more money. Is that not obvious? Let's just stick with the example here before moving on and understand what has actually happened. 

[Pointedstick]

How can you guys possibly think the bank having bonds on it's balance sheet is the same as cash?  The only thing it can buy with it's bonds is cash. (correct me if that's wrong please)

No, they're not the same. But they're both valued at roughly equal levels on the balance sheet. That's all we're trying to say.

Let's imagine you woke up one morning and discovered that the money in your emergency fund had been swapped for 0.1% interest T-bills. You will probably feel pissed off. But will you feel poorer or richer? I don't think so; The T-bills are worth approximately what your cash was worth, and if you don't want to keep them, you can always sell them and receive cash right back, as you pointed out.

These bonds are not literally identical to cash, it's true. But they can easily be sold for cash and have about the same value on your personal balance sheet as cash with the same face value. Your total net worth has not really increased or decreased.

That you can't buy groceries with bonds does not detract from their status as something on the "asset" side of your balance sheet--same as stocks and gold.

[Kshartle]

How does Gumby have more money than had before?  Before, he had an IOU from MDRAF.  Now he has cash from you equal to the value of the IOU.  But, because you pushed the interest rate down, he has less money than he would have prior to your pushing the interest rate.

And MDRAF had the $2000 from Gumby prior to your getting involved.  How did your involvement change anything (besides lowering MDRAF's interest payments on future IOUs that he issues to Gumby by $1 per month)?

And, yes, you have that extra $1 per month in interest payment now.  Big freaking deal.  You can't actually buy anything like diapers or food with that money.

MDRAF has $2000 more than when we started. Gumby might have slightly more than when he started if I pay slightly more for the IOU than he did and I am receiving a tiny amount of interest that I didn't earn.

As I said, your involvement did not change anything very much at all.  Prior to your involvement, Gumby lent MDRAF $2000.  MDRAF was spending that money.  You didn't have anything to do with that.

No one has actually earned anything or produed anything and yet there is more money. Is that not obvious? Let's just stick with the example here before moving on and understand what has actually happened.

Yes, it is obvious that government deficit spending creates net financial assets.  No one disagrees with this.  But your buying the IOU from Gumby didn't do much at all.

No one has produced anything?  The diaper manufacturer certainly did.  As did the formula manufacturer.

Come on man. There are more dollars and not more stuff. The diapers and formula are not part of the transactions being described, they are there to demonstrate MDRAFs motivation for borrowing. If you can't admit this it appears to me you are just being argumentative.

[Kshartle]

Guys it's cool really. We can't discuss this stuff here. We should avoid the topic of QE and it's effect on the economy.

We can't?  Why not? I enjoy talking about it.  Others seem to as well. 

But if you don't want to discuss this, that's totally cool with me.

Sorry guys, that was frustration getting the better of me. I should have WE can't successfully discuss this stuff because we have extremely fundamental disagreements on basics and we always return to those basics.

The topics can be discussed best I think only by people who agree on the these absolute basic concepts. Obviously we both think our understanding is correct and that's a sticking point.

Sorry again, just frustrated.

[Kshartle]

MDRAF has $2000 more than when we started. Gumby might have slightly more than when he started if I pay slightly more for the IOU than he did and I am receiving a tiny amount of interest that I didn't earn.

As I said, your involvement did not change anything very much at all.  Prior to your involvement, Gumby lent MDRAF $2000.  MDRAF was spending that money.  You didn't have anything to do with that.
[/quote][/quote]

You didn't address this part, which I view as analgous to QE.  Do you have any comment?

[/quote]

I've addressed it very clearly. I believe you are ignoring it deliberatly. You are ignoring anything past Gumby lending him the money. You are ignoring the entire point of the thread which is related to QE. You are ignoring the actual QE.

[Gumby]

My understanding of Primary Dealer (and Fed) reserves is that reserves don't enter into the economy to actually buy anything, but instead, simply provide lubrication and buffer for the payment system between banks.  So when the Fed buys a bond from a Primary Dealer, the "moneyness" (to use one of Cullen Roche's terms) doesn't even change that much, because reserves are never spent into the private sector.

Correct. The reserves are basically just used for interbank transfer and interbank overnight loans. There are a few other things that reserves are used for, but you are correct that they never leave the reserve accounts at the Fed.

For non-banks (i.e. account holders at Primary Dealers), my understanding is that the proceeds from a sale of a T-bond are not reserves, but are more like money in a checking acount.  That is, they have a higher degree of moneyness and therefore can be "spent" whereas T-bonds cannot.

However, since the account holder has no more financial assets than he had before, he is not going to spend.

Do you agree with this?

When you say, 'an account holder at a primary dealer,' are you talking about an individual, selling your own T-bond to someone else on the secondary market? If so, then, it is no different than moving money from savings into checking (a higher degree of moneyness). However, since an individual cannot sell his T-Bond to the government — and only sell it with the private sector — the degree of moneyness in the private sector doesn't change on a Macro level.

If anything, people wind up with less savings in their bank accounts with QE, since the private sector winds up with less interest income.

Kind of funny, isn't it?  So many people think QE adds money to the private sector, but, in fact, it removes income!

Exactly.

[Gumby]

How can you guys possibly think the bank having bonds on it's balance sheet is the same as cash?  The only thing it can buy with it's bonds is cash. (correct me if that's wrong please)

Kshartle, I don't know how else to say this, but the overwhelming majority of our economy's purchasing power is not denominated in cash. It just isn't.

Another measure of money, M0, is also used; unlike the other measures, it does not represent actual purchasing power by firms and households in the economy. M0 is base money, or the amount of money actually issued by the central bank of a country.

Source: http://en.wikipedia.org/wiki/Money

Does that make sense to you, Kshartle? M0 does not represent our purchasing power. It is nothing more than what the Fed uses for interbank transfers at the end of the business day, to settle up the change in deposits between banks. That's it!

If you increase the amount of M0 for interbank transfers, and you take away an equal amount of purchasing power from the private sector, the total purchasing power in the private sector DOES NOT CHANGE.

What QE is, in effect, is an interest free loan to the government.

You are oversimplifying it. First of all, a fiat government is never rich or poor, so it really is just numbers in a computer from the government's perspective (i.e. it's a little silly to imagine a fiat government giving itself a free loan).

But, you're forgetting that the Fed does not purchase anything directly from the Treasury. The Primary Dealers buy the bonds at auction — with its own reserves from previous government spending. That's what legally enables the government spending — but it's a bit of an illusion since the reserves created by previous government spending is what enables the Primary Dealers to buy those bonds at auction. The Fed purchasing the bonds after the fact simply lets the government off the hook from having to make the interest payments that it has no trouble making. And truthfully, the banks would honestly rather have the bonds, since the bonds would give them more interest income on their reserves than IOR.

Gumby loans him the other 2k per month needed to get by. He receives a note that promises repayment with interest...Every month I print 2k or slightly more and buy the note from Gumby...Gumby has as much money or possibly slightly more

I am no richer after the transaction because the extra money you gave me usually doesn't cover the lost interest income on that savings (plus I believe the tax rate on the sale is more than the tax rate on interest, in reality).

MDRAF has 2k more which will be spent and bid up prices.

No, no. QE doesn't enable the government to spend that money. The bonds are purchased by the Fed from the Primary Dealers on the Secondary Market. Sales on the Secondary Market do not have any effect on the Treasury's ability to spend. You will miss this point if you try to oversimplify it.

And finally, the Fed could not monetize a bond if the bond did not exist in the first place. It's the net deposit of the bond in the private sector that enables the government to create its own currency.

[Kshartle]

Your last post messed up the attributions.  I'll fix them below.

MDRAF has $2000 more than when we started. Gumby might have slightly more than when he started if I pay slightly more for the IOU than he did and I am receiving a tiny amount of interest that I didn't earn.

As I said, your involvement did not change anything very much at all.  Prior to your involvement, Gumby lent MDRAF $2000.  MDRAF was spending that money.  You didn't have anything to do with that.

You didn't address this part, which I view as analgous to QE.  Do you have any comment?

I've addressed it very clearly. I believe you are ignoring it deliberatly. You are ignoring anything past Gumby lending him the money. You are ignoring the entire point of the thread which is related to QE. You are ignoring the actual QE.

I guess I don't quite understand then.  Because in my mind I've addressed it.  My quick summary:

Part 1.
Gumby (private sector) lends MDRAF (govt) $2000 at some interest rate.  MDRAF spends this money into the economy, buying diapers and formula.  Private sector people receive that money that they would not have received had MDRAF not bought the diapers and formula.  Yes, there is more money circulating around than had Gumby not loaned MDRAF the money.

Part 2. You (the Fed) buys MDRAF's IOU from Gumby for $2001 (it is worth a little more now because you pushed interest rates down; OTOH, he would have preferred those higher interest payments over time, so he actually is worse off).  Gumby is now looking for some other place for his savings.  He isn't going to spend this (if he was planning on spending it, he would not have loaned it to MDRAF in the first place).

To reiterate, Part 1 adds money to the economy.  No doubt.

But part 2 doesn't.

As Gumby (the real one) implies, I am leaving other entities out of the example.  But I think even the simplified example shows that QE is simply an asset swap, and does not affect purchasing power.  I welcome comments.

Money in the bank is still in the economy. It exists whether it's in the bank or in the hands of diaper makers.
More money exists after I print it. Not before.

Why did you sell me the bonds if you preferred not to?

Let's keep this simple and not bring the multiplier effect of fractional reserve banking or anything in.

Regarless I never said Gumby was a bank. Let's keep it really basic.

[Kshartle]

As Gumby (the real one) implies, I am leaving other entities out of the example.  But I think even the simplified example shows that QE is simply an asset swap, and does not affect purchasing power.  I welcome comments.

After the first transaction takes place, does MDRAF have more purchasing power? What about Gumby?

After the second transaction takes place, does MDRAF have more purchasing power? What about Gumby? What about me?

Comparing the start to the end, does MDRAF have more PP? What about Gumby? What about me? Did we produce anything to earn that PP? What did we trade for it?

[Kshartle]

As Gumby (the real one) implies, I am leaving other entities out of the example.  But I think even the simplified example shows that QE is simply an asset swap, and does not affect purchasing power.  I welcome comments.

After the first transaction takes place, does MDRAF have more purchasing power? What about Gumby?

MDRAF: yes. 
Gumby: No.  He has the same as he had before.


So someone borrowing from someone else creates purchasing power? You admit MDRAF can buy more than before and now Gumby can buy the same amount as before? They didn't produce anything of value and trade it and yet they can now buy more than before. Does that make any sense to anyone?

[Gumby]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power. If MDraf is the government, he has no constraints on his purchasing power to being with (i.e. he can always issue more debt). MDraf gains purchasing power by issuing the bonds out of thin air in the first place.

Think about it, the $2K money I had to lend Mdraf originally came from Mdraf creating debt in the first place!

[Kshartle]

As Gumby (the real one) implies, I am leaving other entities out of the example.  But I think even the simplified example shows that QE is simply an asset swap, and does not affect purchasing power.  I welcome comments.

After the first transaction takes place, does MDRAF have more purchasing power? What about Gumby?

MDRAF: yes. 
Gumby: No.  He has the same as he had before.

After the second transaction takes place, does MDRAF have more purchasing power? What about Gumby? What about me?

MDRAF: No.  He has the same as he had before.
Gumby: No.  He has the same as he had before.
You: immaterial.  You can only buy IOUs.

After the second transaction Gumby can now buy something with the dollars. What could he buy previously with the IOU? 

[Kshartle]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power. If MDraf is the government, he has no constraints on his purchasing power to being with (i.e. he can always issue more debt). MDraf gains purchasing power by issuing the bonds out of thin air in the first place.

Think about it, the $2K money I had to lend Mdraf originally came from Mdraf creating debt in the first place!

You didn't have the 2k until he borrowed it from you?