ChrisMartenson.com

[Gumby]

Before:
Treasury has $0 assets and $15T in liabilities (T-bills owned by Lone Wolf.)
Lone Wolf has $15T in assets because he holds $15T in T-bills (appropriately balanced to 25% within my PP, of course!)  $0 liabilities.
Federal Reserve has $0 assets and $0 liabilities.

Total: $15T in assets, $15T in liabilities.  Net: $0.

Now the Treasury mints these fantasy platinum coins and sells them to the Fed.  I am assuming that these things are indeed legal tender and the Fed can divest itself of them if it wished to do so.  Perhaps at the world's biggest change machine.

The Treasury uses the $15T in cash it gets from the Fed in order to buy up all of my T-bills, canceling the national debt.  Now we've got:

After:
Treasury has $0T in assets and $0T liabilities.
Long Wolf has $15T in assets (Federal Reserve Notes) and $0 liabilities.
Fed has $15T in assets and $15T in liabilities.

Total: $30T in assets, $15T in liabilities.  Net: +$15T.

^^^ That looks like severe monetary inflation to me.

LW, in this case you are the private sector. Your spending/saving ability is the same at the end of the process as it was at the beginning. Nothing changed in the private sector. Therefore, no inflation.

The net financial assets in the public sector (i.e. in the Fed/Treasury) can't create inflation unless new net financial assets enter the private sector somehow. But the Fed isn't allowed to increase net financial assets in the private sector. Only Congress has the power to increase net financial assets in the private sector via spending by the Treasury. If the Fed had the power to increase net financial assets in the private sector, we'd have inflation by now. Contrary to popular belief, the Fed doesn't have the authority to do a helicopter drop. Monetization, spending and helicopter drops have to come from the Treasury as instructed by Congress's budget.

Also, the Fed buys the Treasuries from you. Not the Treasury.

[moda0306]

Guys,

You keep skipping my question.  how does the Fed ever increase the money supply if the only thing they can buy are bonds that were bought with printed money?

[Gumby]

Gumby, I'm not sure that the platinum coin trick would stop there from being no new net financial assets. Deficit spending with base money with no debt attached would still create more net financial assets but in the form of base money.

Of course future spending would increase net financial assets. The platinum coin trick is just used as a swap to buy up existing Treasuries whenever needed. The idea that was actually floated was to mint a $2 or $3 trillion coin to deposit in the Fed to buy back existing debt and avoid the debt ceiling. I'll have to re-read the suggested plan because I have a feeling it will answer a lot of LW's questions.

Lone Wolf, the problem with your accounting IMO is that you do not recognise that the stock of government debt always increases. New NET (note NET NET NET ) financial assets are what the MMTers are on about. They are talking macroeconomics. They only care that overal the NET amounts of bonds etc are increasing.  If bonds as a whole were to be paid down in the future then they would be behaving as you and not as the MMTers describe.

Well, MMTers don't really care if bonds exist or not. MMTers see bonds as a legacy system that's no longer needed with a fiat currency. We have the power to increase the debt to infinity (though MMT would never recommend doing that), but it would be a lot easier for people to comprehend and implement if we just did away with the motions of issuing "debt." I believe MMTers have suggested merging the Treasury and Fed into one entity and I'm pretty sure the Primary Dealers wouldn't be needed anymore (but I'd have to check that).

Guys,

You keep skipping my question.  how does the Fed ever increase the money supply if the only thing they can buy are bonds that were bought with printed money?

Moda, it's difficult for me to double-check this from a phone, while on vacation, but I'm fairly certain that the Fed does not have the authority to create new net financial assets. That role is limited to the Treasury as instructed by Congress. The Fed has a balance sheet that it needs to keep balanced. The Treasury can actually mint as much debt-free or debt-based money as it wants to in order to fulfill Congress's budget.

And remember, the Treasury always spends the money before it issues the corresponding bonds so that the reserves to buy the bonds actually exist.

[moda0306]

Moda, it's difficult for me to double-check this from a phone, while on vacation, but I'm fairly certain that the Fed does not have the authority to create new net financial assets. That role is limited to the Treasury as instructed by Congress. The Fed has a balance sheet that it needs to keep balanced. The Treasury can actually mint as much debt-free or debt-based money as it wants to in order to fulfill Congress's budget.

And remember, the Treasury always spends the money before it issues the corresponding bonds so that the reserves to buy the bonds actually exist.

Gumby,

The fact you're doing all this on vacation is amazing.  Tell your wife thank you.  I guess I didn't realize the treasury could do that.  I thought (thinking debt-ceiling debate) that they literally did have to issue debt for all new spending.

[Gumby]

I guess I didn't realize the treasury could do that.  I thought (thinking debt-ceiling debate) that they literally did have to issue debt for all new spending.

Well, that's what we were all taught in school. In reality, when the government needs money to fight a war, or build a missle, it doesn't call China and ask them to buy our bonds. And mathematically that wouldn't work because the money to fund the government would be coming from banks loaning out money in nested loops. No, there is no red phone to China asking them for more money. The government spends the money first and issues the bonds later to drain bank reserves (where the newly-spent money winds up as soon as the first check from the government is deposited in a bank). The bonds don't fund the government. They are only useful for draining bank reserves and targeting interest rates. But you could achieve the same thing with a government-backed CD. MMTers really just want to simplify a very complex and convoluted system.

In regards to the debt ceiling debate, the debt ceiling did prevent the Treasury from spending money after awhile. It was a very serious issue. Remember, the Treasury was still able to operate for about 8 additional months after the initial ceiling deadline was first missed. And after those extra emergency measures were exhausted they would have needed to issue new bonds to offset all that previous spending without resorting to the platinum seignorage escape hatch. But even when the emergency measures aren't being implemented, the Treasury's spending always happens before the corresponding bonds are issued. It's necessary, otherwise the high powered money to buy the bonds wouldn't exist.

[stone]

moda you seem to be suprised that the Treasury can increase the money supply by deficit spending that only produces new net financial assets in the form of bonds. If the treasury deficit spends $1T and sells $1T of bonds, then all the new net financial assets are in the form of bonds as you say. The reason why that increase in the stock of bonds may increase the money supply is because M1 money supply is massively larger than just the M0 base money. Banks are able to make loans (that consitute most of M1) and are not really constrained by the supply of bank reserves when they make loans. The factors that constrain banks from making loans are primarily the availability of credit worthy borrowers and bank capital requirements. Bank capital can be held in the form of government bonds. In fact regulators normally want most of bank capital to be held as government bonds. So having more bonds out there facilitates banks getting more.

It is a really key concept that increases in base money M0 are neither neccessary nor sufficient for causing increases in the money supply M1. Base money can simply be moved around quicker so as to service an expanded economy. There is no need for more base money. Changes in the turn over rate (velocity) of base money can offset very major changes in the stock of base money.

Lone Wolf, is your anxiety that the private sector will somehow act differently if they perceive that the government sector has fewer liabilities after having issued M0 with no bond attached? That sounds like the "Ricardian Equivalence" hypothesis. A lot of effort has been put into trying to find so much as a hint that the public do act in a way that suggests that they are concerned about government liabilities. No such evidence has ever been found AFAIK.

[Gumby]

Lone Wolf, is your anxiety that the private sector will somehow act differently if they perceive that the government sector has fewer liabilities after having issued M0 with no bond attached? That sounds like the "Ricardian Equivalence" hypothesis. A lot of effort has been put into trying to find so much as a hint that the public do act in a way that suggests that they are concerned about government liabilities. No such evidence has ever been found AFAIK.

I feel that Lone Wolf is about 5 minutes away from having the same eureka moment I experienced a few months ago. We've covered how the dollars to buy more Treasuries always exist as targeted bank reserves, waiting to be drained and targeted by the Fed, in coordination with each Treasury auctions. We've covered how Treasuries are already as liquid as a pure cash savings account or a money market account. And we've covered the fact that no new net financial assets are added to the private sector if Treasuries were swapped for dollars. Therefore, the are no new net financial assets in the private sector to cause inflation.

He's so close. Wait for it... Wait for it...

[moda0306]

So If the govt truly can spend without issuing bonds to pay for it, what is the process of issuing debt?   It appears that the treasury always issues debt for its spending, and if there was a debt-ceiling crisis it would indicate that we truly did have to issue debt to spend per our budget.?

This just doesn't seem to quite make sense to me.

If spending truly doesn't involve a treasury bond issuance the rhetoric surely seems to point the other way.

[stone]

moda, currently the law for the USA is that all spending by congress has to be matched by taxation or issuance of debt by the treasury (if we ignor the putative platinum coin loop hole for the minute). I think the MMTers point is that that is just a rule plucked out of thin air for no sensible reason rather than being a rule that makes things work better. They point out that up until the 1980s Australia did not use the size of the deficit as a yard stick against which to decide how much treasury debt to issue. Also some countries such as Norway actually issue treasury bonds despite taxing more than the government spends.
I get the impression that some MTTers feel that the bond link to deficits is a regulatory capture by monied interests who seek welfare payments from everyone else and use bamboozlement to instill the idea that there is no alternative. 

[Gumby]

Moda, when our money was backed by gold, we needed to issue bonds, or tax, to offset our spending (i.e. when there wasn't enough gold in Fort Knox). But, when we went fiat, in 1971, Congress never changed those laws about issuing bonds. So, the Treasury still has a Congressional mandate to issue bonds even though a country doesn't need to issue bonds when it's fiat.

Treasury bonds don't "fund" anything now. In reality, the bonds only serve to drain bank reserves and target interest rates. We spend first and issue the bonds later just to satisfy Congress's mandate and have a "debt ceiling" that can technically be ignored if the Treasury just minted a large enough coin.

Most members of Congress still believe that the gold-standard-era laws are still necessary, even though the Treasury could easily be printing at the same rate is supposedly "borrows" at, and the government could easily migrate to government-backed CDs instead of Treasuries to drain reserves and target interest rates. In other words, we don't need any "debt" or "borrowing" for the government to operate. It's all being run with an incredibly arcane and obsolete system. However, that legacy system allows Congress to provide oversight in a way that it's used to.

Since the laws were never changed, our media and academic textbooks never quite picked up on the difference between a fiat currency and a gold-standard currency. And now everyone thinks MMTers are crazy even though they are the only ones who seem to grasp the fact that there is a fundamental difference between pre-1971 government spending and post-1971 government  spending.

[Gumby]

Moda, here's a great post written by someone who recently had their eureka MMT moment:

Modern Monetary Theory (MMT) is "a description of the monetary system within a nation operating a fiat currency which involves an autonomous monetary system, monopoly supply of currency and floating exchange rates. MMT describes how a government creates, destroys and utilizes its monetary unit and also how the private sector utilizes the state’s monetary unit for its own benefit." - Pragcap.com

Why did I become a MMTer recently (this year)? Because it just makes SENSE. It (almost) perfectly describes how the economics of a nation running on a fiat currency works. What I love about MMT is that it’s apolitical; there is no choosing the “left”? or “right”?. Both sides have valid points that MMT builds on.

I had always believed in some of the concepts MMT preaches, but I never knew of a logical way to validate it. I always knew the dollar couldn’t just “collapse”? because it was not backed by anything. That’s preposterous. I never knew of a valid reason why this was true. With MMT, I learned that yes, the dollar itself is valueless, but it still has buying power- which is based on the productivity and efficiency of a nation. However, MMT does not dismiss the notion that a fiat currency can collapse. MMT provides great reasons why a collapse is possible (ones currently not applicable to the US).

Another concept I always believe was ridiculous was comparing the US to a household (or person). My previous thinking was the US was a government serving millions of people in a complex economy while the household was a very small number running on basic microeconomics; thus the comparison was incomparable. But, as MMT shows, the difference exists because the US government is a Currency Issuer while a person, household or state, is a Currency User.

I like that MMT favors lower taxes when an economy is doing poorly and favors higher taxes (to control aggregate demand if inflation is high) when an economy is doing well. I had always supported this position, but since I believed we must “balance the budget”? (which, as proven by MMT, can choke the private sector surplus), I supported higher taxes all the time. But as MMT shows us, there is no need to “balance the budget”?; however, this does not mean we can just run huge deficits without any consequence. “Deficits don’t matter”? is a ridiculous claim by people who do not comprehend the fundamentals of MMT.

MMT also dives into deeper issues like the FED’s/Treasury’s role (which I also believed should be interconnected), taxation’s dual-role, appropriate spending, the bond market (and how its a relic of the Gold Standard system), and many other issues.

MMT is just the perfect way to describe’s today’s monetary system. As I said earlier, MMT just makes sense.

Questions like —- “Why are the US’s and other developed nations’ bond yields so low? Why are some much higher? How does hyperinflation come about and how come QE did not bring any permanent lasting inflation? How do we get out of a recession? How should we avoid going into prolonged recessions? ——All of which can be easily answered/explained by MMT (along with any more questions).

In conclusion, MMT is the only way we can truly understand our economic problems and find solutions for them. MMT easily dispels mainstream economics that are based on neo-classical ideals which do not make sense today’s modern monetary system. I know this may not be the best detailed promotion of MMT, but I urge you to learn more about it if you have not done so already.

A BIG thanks to both @TheStalwart (Joe) and @PragCapitalist (Cullen). Joe eventually linked me to Cullen which is how I learned and picked up MMT.

Here are a few sites I follow for MMT perspectives:

http://pragcap.com (MUST check out Cullen’s primer)
http://bilbo.economicoutlook.net/blog/
http://neweconomicperspectives.blogspot.com/
http://moslereconomics.com/
Source: http://thearmotrader.tumblr.com/post/14 ... -this-year

[stone]

Gumby, I guess for Australia it couldn't be called a legacy because they had an intermediate stage where deficits did not have corresponding bond issuance.
Perhaps what was behind all of this was a wish to import commodities without giving anything much in return. Previously the developing countries did not have an industrial base. So if the USD, GBP, Yen etc were strong currencies, that did not result in jobs going to the developing world. It just meant that we got minerals, timber, rubber, cotton etc from them and in return, their despotic rulers put their loot into developed world asset markets further strengthening developed world currencies at the expense of developing world currencies. Having the bond system makes it very attractive to save in USD. So electronic account statements were all that the US etc needed to provide in exchange for commodities. Things have got messy now because rather than the developing world just exporting commodities that we can't produce (eg rubber, copper, tea, coffee etc) they also export manufactured goods in direct competition with developed world workers (though perhaps at least for now for developed world corporations). I think the bond system was in aid of a strong USD policy that is now coming unstuck.

[moda0306]

Gumby,

For som reason my "monetary base" math was playing tricks on me.  Most of what you've posted I understand and I was 95% of the way to my eureka moment.  It makes sense now.  Functionally, I still may not understand exactly what order the treasury spends and issues debt for that spending, but it's almost irrelevant.

If there is $1 trillion in monetary base, and the treasury spends another $100 billion in deficit spending while immediately issuing bonds, if the fed is right there waiting to use those bonds as a monetary tool, it's as if they didn't really have to be issued in the first place.

What I find most interesting at this point is how MMTers insist that monetary base is almost completely irrelevant, as banks can borrow from the fed if they can find enough qualified borrowers but dont have the reserves to do the lending.

I think where LW is missing the boat is in assuming that the act of increasing the monetary base has a huge impact.  If the dollars are issue out of thin air, then, by definition, so are the bonds that soak them up.   The former is just a bit scarier to most people, inflation-wise, since they are viewing banks and consumers as actually being constrained by bonds in a way that they weren't with cash.

This Is obviously not the case.  Having more net financial assets in the domestic system (deficit slending) is what will change our attitudes about the value of homes, investments and consumer goods, not whether those financial assets are cash vs bonds.

If somebody gave me $10k in cash or $10k in treasury bills I would be equally as ecstatic and likely to consume.  If they gave me $10k in cash for my already-owned $10k in treasury bills I would be in the same position I was and therefore would have no reason to change my spending habits.

I am an accountant so the idea of a balance sheet being a snapshot of the health of any business or household is strong with me.  WHAT the assets and liabilities are and their duration does matter to some degree, but the huge overriding factor is the net balance... And by no means does a cash balance vs treasury bill balance make any lick of difference on a balance sheet.  If financial liabilities are too high and real assets are depressed, a new financial asset will be a real game changer if in the proper amounts.  This is what will get us to spend, and maybe eventually inflate.

[stone]

Gumby my exasperation with MMTers is partly because they talk about tax in a blanket way as though an asset tax would have the same pro-cyclical effect as a sales tax. To my mind it is very hard to see how an asset tax would induce people to forgo spending money on training staff, building factories, going on holiday or whatever as MMTers claim is always the case for tax. To my mind the inducement from an asset tax is almost in the opposit direction to the inducement from a sales tax. So balancing the budget with an asset tax and never having deficit spending would be just as (IMO more effectively) counter-cyclical as the MMTers prescription of "deficits need to be increased until unemployment is under 2%". To my mind the MMT prescription of deficits to order would just induce an orgy of speculation and financialization. The economy would be distorted into being a deficit harvesting machine.

[stone]

moda, if you are a bank and someone gives you $10k in treasury bonds, you can then make a $100k CASH loan. I think that function of the banks is also key to understanding this.

[Gumby]

Gumby, I guess for Australia it couldn't be called a legacy because they had an intermediate stage where deficits did not have corresponding bond issuance.
Perhaps what was behind all of this was a wish to import commodities without giving anything much in return. Previously the developing countries did not have an industrial base. So if the USD, GBP, Yen etc were strong currencies, that did not result in jobs going to the developing world. It just meant that we got minerals, timber, rubber, cotton etc from them and in return, their despotic rulers put their loot into developed world asset markets further strengthening developed world currencies at the expense of developing world currencies. Having the bond system makes it very attractive to save in USD. So electronic account statements were all that the US etc needed to provide in exchange for commodities. Things have got messy now because rather than the developing world just exporting commodities that we can't produce (eg rubber, copper, tea, coffee etc) they also export manufactured goods in direct competition with developed world workers (though perhaps at least for now for developed world corporations). I think the bond system was in aid of a strong USD policy that is now coming unstuck.

Interesting.

WHAT the assets and liabilities are and their duration does matter to some degree, but the huge overriding factor is the net balance...

Right, so we could simply stop issuing longer-term treasuries, let them mature, and gradually replace them with a government CD (or some other savings instrument) — that way the transition away from bonds would be gradual and not shocking to the market.

Gumby my exasperation with MMTers is partly because they talk about tax in a blanket way as though an asset tax would have the same pro-cyclical effect as a sales tax. To my mind it is very hard to see how an asset tax would induce people to forgo spending money on training staff, building factories, going on holiday or whatever as MMTers claim is always the case for tax. To my mind the inducement from an asset tax is almost in the opposit direction to the inducement from a sales tax. So balancing the budget with an asset tax and never having deficit spending would be just as (IMO more effectively) counter-cyclical as the MMTers prescription of "deficits need to be increased until unemployment is under 2%".

It sounds like you just disagree with some outspoken MMTers. I don't believe MMT itself prescribes any specific taxation policies. Taxation is just how the currency is destroyed. Your approach seems very well thought out and I suspect it would be praised by many MMTers if it were ever implemented (versus what's being implemented now). I mean, I think you could easily call yourself an MMTer and still prescribe all of those recommendations in contrast to other MMTers.

To my mind the MMT prescription of deficits to order would just induce an orgy of speculation and financialization. The economy would be distorted into being a deficit harvesting machine.

That's probably true. This is a flaw of human nature (not MMT per se). Like greedy dogs who are programmed to devour their food for survival, our nature as a species is to exploit every political and monetary system — even past the point of unsustainability. Ultimately, corruption and greed will kill any monetary policy. I just see MMT as a description of how our money supply actually works. I'm not saying it wouldn't be exploited or corrupted. It probably would.

[moda0306]

Stone,

I understand credit-expansion above-and-beyond M0 plays a huge role.  Those are all products of private-sector lending and create net-zero financial assets, so I am kind of putting it on the back burner for this discussion, though it becomes real valid real fast when discussing the real causes of inflation and consumption.

[Gumby]

Stone,

I understand credit-expansion above-and-beyond M0 plays a huge role.  Those are all products of private-sector lending and create net-zero financial assets, so I am kind of putting it on the back burner for this discussion, though it becomes real valid real fast when discussing the real causes of inflation and consumption.

True, but banks aren't reserve constrained, they are only constrained by the number and demand of qualified borrowers. When banks find a qualified borrower, they go out and find the reserves. The Fed helps when necessary. Perhaps the bigger problem is having too many qualified borrowers (with too much disposable income).

[moda0306]

Stone,

I understand credit-expansion above-and-beyond M0 plays a huge role.  Those are all products of private-sector lending and create net-zero financial assets, so I am kind of putting it on the back burner for this discussion, though it becomes real valid real fast when discussing the real causes of inflation and consumption.

True, but banks aren't reserve constrained, they are only constrained by the number and demand of qualified borrowers. When banks find a qualified borrower, they go out and find the reserves. The Fed helps when necessary. Perhaps the bigger problem is having too many qualified borrowers (with too much disposable income).

Yes.  That has become clearer to me.  Do we have any instances in history (70's?) where banks were running out of sufficient reserves to make loans and the fed was loaning them funds to a great degree?

[stone]

Gumby, have you ever come across anything from an MMT source that doesn't advocate increasing deficits? Doesn't Abba Lerner specifically talk about the size of the deficit being the method that should be used to keep the economy on track?
I have posted on billy blog and they seemed extremely hostile to what I said. They view people who post along the lines of what Lone Wolf was saying as potential new converts to welcome into the fold. They seemed to view me as the anti-christ

I think for them it is crucial that any lack of faith in their deficit increase prescription can be put down to a lack of comprehesion of how fiat money is set up. To them if you comprehend the basics of fiat currency, then it ought to be self evident that deficits should increase until supposidly that leads to full employment. I think they consider that anyone who disagrees must either be dumb or be wanting to exploit other people's dumbness. What they hated was that I was questioning whether what they prescribe actually makes much sense on the basis of how they say fiat money works. I think the gist of what they were saying was that something like an asset tax would never be politically acceptable whilst huge deficts would be. If everyone who didn't like unemployment wasn't singing from the same hymn sheet, then the austerians would not have effective opposition. I was saying that lack of effective opposition was because their prescription for huge deficits was seen by all right thinking people as perilous.

This site is a very refreshing change because people on here do not expect to agree with each other and do not seem threatened when we don't. We all seem happy to try and explain how we see things and happy to try and understand how other people see them.

[stone]

moda the "discount window" facility of the fed (and the bank of england etc) was used a lot in the 2008 crisis because interbank lending ground to a halt because banks didn't trust each other. The penalty cost of getting reserves from the Bank of England was what caused the death of Northern Rock (a UK bank that went bust).

[moda0306]

Stone, 

Yeah I kind of figured it was used in 2008.  Are there any other examples?  I am trying to think of something where the economy was growing beyond what reserves could handle.

[stone]

The Fed very recently lent USD to eurozone banks but again that was because of lack of trust freezing interbank lending.
I think the friction from interbank lending would normally be very minimal. For a very large bank, both the person they made the loan to and the person who received the spending of that loan are often both customers of the bank. Then no bank reserves are needed I guess. The bank just moves numbers around on a computer screen. Perhaps getting hold of the loan interest payments puts some sort of friction on the system? As you say the banks are constrained by their capital ratio requirements (ie having a stock of bonds etc purchased using retained bank profits and funds raised by issuing bank corporate debt). When banks make losses or the assets they hold as capital themselves depreciate, then banks can not lend so much. I think that is massively more of a constraint on banks than bank reserves are. Interbank lending tends to freeze up because other banks don't trust the assets that other banks are holding as capital (eg MBS in 2008 or eurozone sovereign bonds now).

[stone]

moda, I think the Basel rules do not make ANY reserve requirements. The US does itself impose a reserve requirement on US banks but Canada has zero reserve requirements. When people talk about "fractional reserve banking", for Canada the reserve side of the fraction is zero! I think there was talk of the Basel rules being modified to have an additional liquidity requirement with banks having to hold 30days supply of reserves or something like that.

[Gumby]

Gumby, have you ever come across anything from an MMT source that doesn't advocate increasing deficits? Doesn't Abba Lerner specifically talk about the size of the deficit being the method that should be used to keep the economy on track?

You're way ahead of me. I haven't read Lerner specifically. I've only been focussing on the basic moving parts of MMT.

This site is a very refreshing change because people on here do not expect to agree with each other and do not seem threatened when we don't. We all seem happy to try and explain how we see things and happy to try and understand how other people see them.

Amen.

Stone, can you refresh my memory? I must have missed your explanation. How do you get to a point where you don't need to put money back into the private sector (via spending) if you are taxing (i.e. destroying money) out of the private sector?

Also, why do these MMTers you speak of want there to be "deficit" spending? I thought that MMT prefers money that comes straight from a printer?