Tapering called off

[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?

[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!

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

No... I didn't have the $2K until he issued the IOU in the first place so that you could "monetize" it. (Where else did the $2K come from?)

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

Sorry, but this is such a convoluted example that is so far removed from reality. In the real world, I can buy whatever the heck I want to with a government IOU because the IOU market is the most asset market in the world.

When you tap TRANSFER TO CHECKING on your ATM, you are literally swapping an IOU for cash so that you can buy something.

If you keep trying to shoehorn this into an island ecosystem with three or four people on it, you'll never see that.

[Kshartle]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power.

You don't see how he has 2k to spend where he didn't until he borrowed it from you?

I don't believe you don't see that.

[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?

No... I didn't have the $2K until he issued the IOU in the first place so that you could "monetize" it. (Where else did the $2K come from?)

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

Sorry, but this is such a convoluted example that is so far removed from reality. In the real world, I can buy whatever the heck I want to with a government IOU because the IOU market is the most asset market in the world.

When you tap TRANSFER TO CHECKING on your ATM, you are literally swapping an IOU for cash so that you can buy something.

If you keep trying to shoehorn this into an island ecosystem with three or four people on it, you'll never see that.

Someone else now has the IOU and you have their dollars. What can they buy with their IOU? Can anyone buy anything other than dollars with their IOU?

You said in another thread "purchasing power was created because you went to work, worked hard and provided goods and services."

Now it sounds like purchasing power is created when the government borrows money. Which one is it?

[Gumby]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power.

You don't see how he has 2k to spend where he didn't until he borrowed it from you?

I don't believe you don't see that.

Tell me, where did I get the 2k to lend to him in the first place if I don't have the ability to create currency.

[Mdraf]

Good morning guys and gals...

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)

Yeah but she's HOT. Eat your heart out !

Too late for me to pick up the thread, but I'm sure they'll be plenty more.

[Kshartle]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power.

You don't see how he has 2k to spend where he didn't until he borrowed it from you?

I don't believe you don't see that.

Tell me, where did I get the 2k to lend to him in the first place if I don't have the ability to create currency.

You might have worked and traded for it, stolen it, gotten it from charity. Many different ways. We all have money and I suspect we don't all have printing presses.

[Kshartle]

Good morning guys and gals...

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)

Yeah but she's HOT. Eat your heart out !

Too late for me to pick up the thread, but I'm sure they'll be plenty more.

I left out her hotness because I didn't want to provide another tangent to drive it off topic when positions become vulnerable.

[Gumby]

Someone else now has the IOU and you have their dollars. What can they buy with their IOU?

Whatever they want to so long as they can easily trade their IOU for dollars — which they can, because the Primary Dealers make sure of it.

Can anyone buy anything other than dollars with their IOU?

In today's world, you can buy whatever you want directly from a Treasury Money Market fund. The bank does all the work behind the scenes for you.

You said in another thread "purchasing power was created because you went to work, worked hard and provided goods and services."

Now it sounds like purchasing power is created when the government borrows money. Which one is it?

What I'm saying is that the government doesn't technically "borrow" money when it wants to spend. It makes net deposits of Treasury debt in the private sector and that enables the government to spend (we want to buy the debt with their government spending to get a return on bank reserves). The Fed simply monetizes the appropriate amount of debt into reserves to facilitate interbank transfers. Most of the time purchasing power is simply created by people working either for private-credit based salaries or government salaries. M0 base money does nothing except facilitate the transfer of those debt/credit-based assets and the government is never reserve constrained.

[Gumby]

You might have worked and traded for it, stolen it, gotten it from charity. Many different ways. We all have money and I suspect we don't all have printing presses.

No, I mean where did the $2K originally come from on this island you speak of? Who issued it?

[Mdraf]

Nobody addressed this part of my yesterday's post:

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

Namely why is the CBO all bent out of shape if deficits don't matter?

If I get a good explanation I'll write a nice letter to them explaining why the folks here think they are misguided.

[Gumby]

Nobody addressed this part of my yesterday's post:

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

Namely why is the CBO all bent out of shape if deficits don't matter?

If I get a good explanation I'll write a nice letter to them explaining why the folks here think they are misguided.

The CBO is basing their calculations using an obsolete gold standard model of reserve constraints — not as a fiat currency issuer. They believe that the government can run out of money, and we say that would be like a stadium running out of points at a football game and having to "borrow" points from football players.

[MediumTex]

It can't be repeated too often that no one is saying that the configuration of the current monetary system is a good thing.

But even as a thing that is not good, it has certain design characteristics that are worth understanding.

If someone wants to say that it's a stupid system, I'm sure that most of us would agree on that point.

IMHO, part of what makes it stupid is that many of the people who are making key decisions about economic, fiscal and monetary policy (especially most members of Congress) seem not to have a strong understanding at all of how the system actually works.

Imagine putting Fred Flintstone behind the wheel of a Chevy Corvair, and that's our current system.

[Mdraf]

From my perspective, we're discussing what the system actually is, and how it functions.  And that knowledge is valuable and interesting to me, even if it isn't to you.

This fanatical belief in the face of reality is known as The Zeal Of The Convert

[MediumTex]

From my perspective, we're discussing what the system actually is, and how it functions.  And that knowledge is valuable and interesting to me, even if it isn't to you.

This fanatical belief in the face of reality is known as The Zeal Of The Convert

How is a description of the way a system actually works a fanatical belief (especially when one is skeptical of the wisdom in that particular system design)?

Are you suggesting that the system actually works in a different way?

[Gumby]

In general, most economists and policy makers evolved their understanding of money from a gold standard type world where bankers hoarded gold and then loaned credit as claims on that gold.  When we went off the gold standard economists and policy makers (and all their textbooks) just swapped gold for bank reserves, held at the Fed, and cash and acted like nothing changed.

When the gold standard died, gold bug economists turned into paper bugs. They just assumed that the paper dollars were the same as gold in their models. However, the more digital our money becomes, the less and less their models are holding up.

Now we live in a world where you can buy things with digital credit and the cash reserves held at the Fed simply just need to be enough to complete an interbank transfer at the end of the day. Beyond that, the extra cash has very little effect in a highly digital credit world where reserves aren't even needed for many everyday transactions.

[Mdraf]

From my perspective, we're discussing what the system actually is, and how it functions.  And that knowledge is valuable and interesting to me, even if it isn't to you.

This fanatical belief in the face of reality is known as The Zeal Of The Convert

How is a description of the way a system actually works a fanatical belief (especially when one is skeptical of the wisdom in that particular system design)?

Are you suggesting that the system actually works in a different way?

I am, and so does the CBO and everyone else who is not a devotee of Cullen Roche

[Gumby]

I am, and so does the CBO and everyone else who is not a devotee of Cullen Roche

And we are simply saying that they are wrong. Their models are all based on gold standard era logic. They didn't change their models after the gold standard died — which is crazy when you consider how different our money supply became after we went off the gold standard.

[MediumTex]

This fanatical belief in the face of reality is known as The Zeal Of The Convert

How is a description of the way a system actually works a fanatical belief (especially when one is skeptical of the wisdom in that particular system design)?

Are you suggesting that the system actually works in a different way?

I am, and so does the CBO and everyone else who is not a devotee of Cullen Roche

I'm sure this has been covered before, but which part of the description of the way the system currently works is not accurate?

Please walk me through which part of the mechanics of a bond auction and Fed asset swap that is not being accurately described here.  Don't talk about consequences of certain policies--just walk us through what part of the description of the way the system actually works is flawed.

I assume that you followed the 2011 budget debacle.  You saw what happened when people started to think that the U.S. government might actually "default" on its debt, right?  Do you not see how that validates much of what we are talking about here?

"Default" by a currency issuer (especially one with the world's largest military, largest economy, largest bond market, etc.) is like some kind of bizarre urban legend that for whatever reason people can't seem to stop retelling as truth.  It's like the story of the retarded kid who captured the hobbit and turned his closet into a hobbit den, and it turned out that the "hobbit" was a midget pizza delivery guy.

The government certainly may do a soft default in the form of inflation, but we are all in agreement that under the current system the government is always constrained by inflation, so we are all aware of that risk.

[MediumTex]

I am, and so does the CBO and everyone else who is not a devotee of Cullen Roche

And we are simply saying that they are wrong. Their models are all based on gold standard era logic. They didn't change their models after the gold standard died — which is crazy when you consider how different our money supply became after we went off the gold standard.

Maybe that's a good entry point for trying to find some common ground here.

Looking back to the early 1970s, what dramatic changes were made in the way that the government described and tracked its assets and liabilities?  I am not aware of any changes, which means that their methodology is almost by definition flawed, since it is based upon a set of obsolete gold standard era assumptions.

Maybe there is a more cynical explanation, though.  Consider this scenario: assume that all of the priests in the Catholic church suddenly became aware that God did not exist.  What do you think they would do?  Would they make the necessary adjustments in the Catholic church, or would they perhaps just continue rolling on under the current system, even though they knew for a fact that its most basic premise had been invalidated?

I think that perhaps in order for the confidence game of a pure fiat money regime to continue the government MUST cling to certain obsolete assumptions because people need to believe in such things for the confidence game to continue.  Thus, we wring our hands endlessly about "default", "unfunded liabilities", and "budget deficits" without realizing that we are doing the fiscal equivalent of worrying that a high scoring football game may need to be suspended due to a lack of points (to cite Gumby's metaphor).

[Mdraf]

I'm not interested in the mechanics. I am addressing the fact that you cannot differentiate between currency and debt

Rinse and Repeat

[MediumTex]

I'm not interested in the mechanics.

Okay, but the mechanics are all that I'm talking about.

The distinction between currency and debt is, I assume, only relevant when trying to figure out what the inflation risk is (why else would it matter in the first place?).  That's not a mechanical issue. 

[Mdraf]

I'm not interested in the mechanics.

Okay, but the mechanics are all that I'm talking about.

The distinction between currency and debt is, I assume, only relevant when trying to figure out what the inflation risk is (why else would it matter in the first place?).  That's not a mechanical issue.

I don't think so. The purported "sameness" of currency and debt lies at the heart of your MR theory. You are using accounting jargon but ignore the fact that not all assets are the same thing and not all liabilities are the same thing.

[Pointedstick]

I don't think so. The purported "sameness" of currency and debt lies at the heart of your MR theory. You are using accounting jargon but ignore the fact that not all assets are the same thing and not all liabilities are the same thing.

We're not saying they're the same thing. We're saying they have the same effect on your balance sheet. Whether the assets column of your balance sheet lists 100k of bonds or 100k of stock or 100k of cash or a 100k house, you still have a net worth of 100k if you have no liabilities.

[Gumby]

I'm not interested in the mechanics. I am addressing the fact that you cannot differentiate between currency and debt

You're a Monetarist that believes in Metalism.  The rest of us look at the credit-based monetary system that exists in the private sector and we believe in the Credit Theory of Money.

It would be easier to believe you if our currency was backed by metal, but it isn't! Our monetary system is overwhelmingly credit-based.