What is a Treasury bond?

[Lone Wolf]

Its not MMT jargon really, the principals are exactly the same. Its just a new situation because a fiat government has infinite reserves.

What makes it jargon is that MMT's "deficit" definition isn't anything like the one used by the CBO, laymen, or any other economists.  (They also do this by defining "private savings" to be "private savings minus private investment".)

Having a different perspective on how things work is perfectly fine (the PP certainly didn't come about via conventional thinking!)  What I dislike is overloading well-established terms with new meanings.

That breeds a huge amount of misunderstanding.  MMT popped up on my radar because I saw it repeatedly cited as justifying our enormous levels of government spending as absolute necessities.  "MMT proves," they would say, "that without a budget deficit every year nobody could ever save!"

They don't see that MMT is using its very own definitions of both "deficits" and "savings".  (Definitions that are IMO really weird.)

Thanks for the conversation.  Overall, I've come away very impressed with you and very unimpressed with MMT. 

To me a clear example of a tax inforcement based monetary system starting afresh is the hut tax system that was used many times by colonialists (eg by Britsh in West Africa and Germans in Namibia). 

Very interesting example, thanks!

[MediumTex]

Where does private sector demand for credit come into the picture?

Even if banks have enough capital and are offering credit at 0%, if there is no demand or ability to service additional levels of debt, it seems like no new lending will occur, and thus the money supply will contract as old loans are paid off.

To me, this seems to be the simple reality we are in right now (though lending standards are tighter now than in recent history).  It seems like a trend like this just has to be allowed to play itself out, and the Fed's actions are token efforts to keep people calm and make them believe that inflation is just over the horizon.

How does demand for credit play into MMT?

For philosophical people, there are more than a few chuckles to be had when thinking about how the IRS is one of the most expansive and complex bureaucracies in history, and its ultimate goal is nothing more than to make people believe that the currency has value.  In a sense, the IRS and the U.S. tax code are very similar to the hut tax scheme described above.

[stone]

Medium Tex, I'm very far from being an MMT expert, but from looking at billyblog my understanding is that MMTers say exactly what you are saying. They say that all the QE etc will not increase bank lending (except perhaps for speculation by the bank trading desks?) because for banks to lend banks need customers that banks can trust will be able to pay the loans back. If instead of QE, fiscal policy was used for stimulus, then bank lending and the M1 money supply would increase. A payroll tax holiday and public works programs or just paying out a citizens dividend would cause people to have a means to pay off debts and create jobs etc. I think Keynes also said the same thing about fiscal policy being the only way out of a liquidity trap such as we are in and Japan has been in since 1990.

Loan Wolf, about the MMT savings equals investment point. Even Wilkipeadia says that investment has a different definition in finance jargon from the definition in economics jargon. Are you using the finance definition and MMTers (amongst others) using the economics meaning? I got in a right muddle about that when I first saw that usage. I think what MMTers (and others) say is that if there is no government sector, and no foreign trade, then savings equals investment is an accounting identity. What they mean by "investment" is the value of unsold inventory and newly created physical capital (things like new railroads, buildings etc). They say that deficits are needed for "net saving". So if there is no deficit, some people can save but others will necessarily have to reduce their savings to match. By savings, they mean any possession of bank reserves, coins and paper money or government bonds. They say all bank created money has a corresponding bank loan and so nets to zero and so does not contribute to net savings.

[stone]

Lone Wolf, Sorry for writing such a muddled comment above about the MMT "net savings". Obviously savings are only money and bonds taken out of circulation. I think the MMT point is that if net saving occures (as an aggregate of everyone accross the economy), then eventually all the money will get taken out of circulation.

[melveyr]

Here is the blog stone is talking about.

http://bilbo.economicoutlook.net/blog/?page_id=1667

I am not too confident with the banking system yet. I am still trying to build off of the foundation as I understand it. He has a lot of articles about banking.

[Lone Wolf]

Loan Wolf, about the MMT savings equals investment point. Even Wilkipeadia says that investment has a different definition in finance jargon from the definition in economics jargon. Are you using the finance definition and MMTers (amongst others) using the economics meaning?

Yep, I'm also using the economics definition of investment.  MMT defines "net savings" to be savings minus investment, so they're saying that in order for there to be positive "net savings" (which means that savings is greater than investment) you must have a "government deficit" (and deficit here includes any new money creation by the Fed for any reason., in addition to what everybody else means when they say "the deficit")

That winds up being a far cry from the pithy-but-wrong "there can be no savings without a government deficit" I so often heard before I read further.

Lone Wolf, Sorry for writing such a muddled comment above about the MMT "net savings".

No worries, you did just fine.  Lower your standards. 

However!  I do see that you called me "Loan Wolf".  Clearly, this must be some sort of land-based version of the "loan shark" I've heard so much about.  It's a bit early in the thread to be accusing anybody of usury! 

Also, the idea of infinite reserves will be put to the test in the coming decades, to pay off the $528,000 per household of unfunded liability.

Yep, that's why I'm not buying the argument that a debt of this size is "no burden".  It's going to get paid either with inflation or with future taxes (and thus slower economic growth.)  Today's low interest rates buy us time, which certainly comes in handy.  Whether the ride's bumpy, smooth or totally off the rails, I'm glad to be in the PP for times like these.

[moda0306]

LW,

Don't be offended by the name slip up (I'm sure you're not)... with all this talk of debt and balance sheets, Freud would say the use of that spelling was completely natural.

Also, LW, the nice thing about that inflation that can be created in the coming years... it can be at the direct pain of our foreign bond holders, as it's the defecits spending given to our own citizens that causes the inflation in the first place.  I highly doubt giving someone a dollar only to have them experience 20 cents of inflation because of it will be the end of the world.  Eventually, maybe, foreigners will get sick of our inflation and try to expel dollars.  That will mean they have to invest or spend in the U.S., thereby improving our economy and balance of trade.

I think that's how the whole machine is supposed to work, and I don't see too many good arguments around it.  Inflation means there's demand from somewhere, and that demand will require economic output, and will tend to fill any excess capacity our plants have, and at that point both businessowners and employees will experience more prosperity than they otherwise would.

[Lone Wolf]

Don't be offended by the name slip up (I'm sure you're not)... with all this talk of debt and balance sheets, Freud would say the use of that spelling was completely natural.

Indeed Freud would have, the old coke-head!  I found this new and improved name kind of awesome.

[MediumTex]

Don't be offended by the name slip up (I'm sure you're not)... with all this talk of debt and balance sheets, Freud would say the use of that spelling was completely natural.

Indeed Freud would have, the old coke-head!  I found this new and improved name kind of awesome.

First Grumby, then Loan Wolf.

What would happen if a balanced north of the border view turned to a dull and plodding latino perspective?

-TediumMex

[Lone Wolf]

First Grumby, then Loan Wolf.

What would happen if a balanced north of the border view turned to a dull and plodding latino perspective?

-TediumMex

5 million terrabytes of data and not one decent result for a "Bruce Campbell wearing a sombrero" image search?  You have failed me for the last time, Google.

Perhaps moda867-5309 can come up with something.

[moda0306]

LW,

I was trying to think what I could be... "modaboatin' SOB" (wedding crashers reference) was the closest I could come to anything remotely funny.

Nice work.

[MediumTex]

First Grumby, then Loan Wolf.

What would happen if a balanced north of the border view turned to a dull and plodding latino perspective?

-TediumMex

5 million terrabytes of data and not one decent result for a "Bruce Campbell wearing a sombrero" image search?  You have failed me for the last time, Google.

Perhaps moda867-5309 can come up with something.

How about Bruce "Diablo" Campbell:

[stone]

Lone Wolf and Gumby, I'm so sorry for inadvertently screwing up with names. It wasn't some attempt to be witty. Cheers for taking it with such good humor!

Personally I see it hard to suss out how the deficits conducted as they are now could lead to traditional wage push inflation. My guess is that the increasing government debts (aka private savings) will instead lead to increasing asset and commodity price volatility. To get wage push inflation, take-home incomes need to increase for people who are not going to just save the increase. (I think the inflation we currently have in the UK is actually just exchange rate slippage pushing up the price of imports). Since the 1970s, median wages have not increased beyond consumer price inflation. At root you have to have customers able to buy stuff in order to support real economic growth and you need to have such demand overwhelm the capacity for economic growth in order to get consumer price inflation.  For that, median wages need to increase. The deficit equation has two sides- tax and spending. Spending on bailing out AIG in order to bail out Goldman Sachs, and tax reduction by reducing inheritance tax is not going to  have much effect on take-home incomes except for people who are just going to pile the money into buying more assets or speculating in the commodity markets. It seems like a recipe for alternate cycles of commodity and stock market bubbles and crashes. - The stock markets gain an unattractively over-valued status so money flows into commodity speculation, -increasing commodity costs cut manufacturing profits so stocks crash. After the crash there is no longer demand for commodities so they crash. Then manufacturing is once again profitable. Rinse and repeat with increasing amplitude and frequency.

What consumer price inflation there is as a result of all of that would be because the wastefulness of it all means that there is less supply to go around. Many of the worst cases of inflation do get triggered by collapsing supply.

[darkcharro]

Very interesting discussion everyone.

I'm still not convinced by the MMT view, or don't understand it completely.
Here are some comments relating to some points made in the discussion. Don't take them as me trying to refute
your points, but as questions from someone not very knowledgeable on the issues.

- I'm not convinced by the first year of fiat money explanation because in the real world it has never happened
as some else pointed out. Money does not need the government to exist. And Murphy @Mises explains that you
don't need the gov. to save and invest either. The appearance of fiat money means that gov. has taken over control
of money from the people, according to some commentators I've read.

- Another thing I'm not clear about is the point about how the fed introduces new money into the economy. Does it
do that by spending? or by lending the money? I'd say lending. The fed lends money to the primary dealers (at almost
0% these days) and to the Treasury buy buying its bonds.

- The argument that the gov can spend as much as it wants because it can print money I think is also not right.
I understand that the economy needs money to function, but the amount of money it needs is bounded by the size of
the economy. Printing too much money will create inflation. If there is high inflation, people will use alternative ways to
store value (save), for example by buying gold, land, etc. Also, if bond buyers perceive the currency is being debased,
they will demand higher interest rates and also save in different ways. China has already slowed purchases of USD assets
and it's been buying gold, even EUR assets, etc. Bill Gross/PIMCO is not just another opinion, it is one of the biggest bond
buyers. He's been dismissed here because of "bad decisions" lately. He has not been wrong or making bad decisions. PIMCO
can't change positions within weeks or months because of its size. Gross is positioning the PIMCO ship in a direction to follow
at least for the next 5yrs (I'm sure you've read that argument elsewhere).

All these is pointing to Bernanke printing more money and higher inflation. Doesn't sound good for LT bonds and cash.