Austrian, market monetarist and MMT economics

[stone]

MG, MMTers say that the central bank in effect is joined at the hip with the government and that they act in concert.  They say that the government spends and that creates bank reserves and taxes which destroys bank reserves. They say that all treasury issuance is only conducted as a way to set interest rates across the yield curve. Issuing treasuries is a way to exchange bank reserves for treasuries so as to create interest paying assets as a form of welfare benefit or to mop up bank reserves to the point where bank reserves have a scarcity value that causes banks to charge each other interest on reserves that they lend each other. Central bank operations are all about setting interest rates.
Personally I think they have a blind spot when it comes to not fully acknowledging the extent to which real interest rates attract capital flows from other countries.
As I said before, I really wonder whether exactly the same operations could be viewed in different ways. So different economic schools of thought could see exactly the same mouse clicks taking place and the same numbers popping up on spread sheets but describe the causation and motivations quite differently

Below is (or was) my current understanding of how the monetary system works.  Where, how and why does MMT differ?


Treasury = Issues and auctions off debt securities in form of bills/notes/bonds to finance Congressional spending ("create money").

Publc = Buys securities directly or indirectly from Treasury ("decreases money to private sector").

Federal Reserve = Buys securities from banks with currency and/or credits the banks' reserve accounts ("lowers interest rates").  Or same, but at slower rate ("raises interest rates").  Or buys directly from Treasury ("print money").

Government Spending = Tax revenues + Change in securities held by public + Change in securities held by the Federal Reserve.

Inflation = Rate of government spending + Change in velocity - Rate of output growth.

[Gumby]

Below is (or was) my current understanding of how the monetary system works.  Where, how and why does MMT differ?


Treasury = Issues and auctions off debt securities in form of bills/notes/bonds to finance Congressional spending ("create money").

MTT agrees that the Treasury creates money. However, MMT disagrees with the notion that bonds "finance" its spending. When a country is fiat, there is no need to "finance" its spending. So, MMT sees that the debt securities are really just a risk-free savings instrument for the private sector — no different from a government CD.

The only reason a country would need to "finance" its spending was if there was convertibility to something (such as gold), or they weren't the sole-issuer of a currency, or if they owed foreign-denominated debt. To finance a true fiat government would be akin to loaning points to a scorekeeper at a football game. Scorekeepers are never at risk at running out of points.

People worry about the government having too much debt. But, if the debt is in its own currency, that's like worrying about the Fed and Treasury having trouble pushing a few buttons to pay its bills. The real concern is inflation, not debt.

Publc = Buys securities directly or indirectly from Treasury ("decreases money to private sector").

MTT says that Treasuries are a savings instrument for the private sector — no different than a government CD. And in fact, purchasing Treasuries does not decrease money in the private sector. We don't feel poorer or spending-constrained when Harry Browne tells us to put 50% of our money into Treasuries. You can even have all of your cash in a Treasury money market fund and have all the check-writing privileges of a bank checking account.

Federal Reserve = Buys securities from banks with currency and/or credits the banks' reserve accounts ("lowers interest rates").  Or same, but at slower rate ("raises interest rates").  Or buys directly from Treasury ("print money").

It's actually illegal for the Fed to buy Treasuries directly from the Treasury. The Bank of Japan can buy bonds directly from its Treasury — effectively printing money. But, the Fed cannot. All Treasury purchases must go through the Primary Dealers first. Therefore, for the Primary Dealers to be able to purchase Treasuries, the cash reserves to purchase those Treasury bonds must exist in advance (either through previous government spending, or short-term loans from the Fed). Even the money to pay taxes must come ultimately from government spending.

Government Spending = Tax revenues + Change in securities held by public + Change in securities held by the Federal Reserve.

MMT says that tax "revenues" are irrelevant to "funding" a fiat government's spending. After all, how does a fiat government effectively "save" money that's entirely created out of thin air? (How does a scorekeeper "save" points?) And if you look at how little "revenue" the government takes in, versus how much it spends, it becomes clear that the Treasury is really just an elaborate fiat operation: printing money (spending), issuing offsetting savings instruments (Treasuries), and deleting money (taxation).

[moda0306]

I think part of getting your head around MMT, or at least the parts it gets most right, is fully absorbing the idea that once you fully detach any promise of payment from the government in gold (or something else) for your currency, the economy is relying on a different set of factors to give your currency value.... the most basic might be taxation, but I'd also argue that reasonable expansion of infrastructure to support a growing economy, legal tender laws, and contracts already in place before the gold standard was dropped all play a role on top of that.

When you fully absorb that at its very base, effective taxation and productive capacity, not something real and tangible, is giving our currency value, then it's easier to see that government paper is simply the monetary freeway on which we transact commerce, not something that directly increases wealth in our society.  It eventually became clear to me that in this world treasury bonds are really not fundamentally different than the fiat cash itself.  Both of them are purchasing power dreamt up by government... one just happens to look more liquid than the other.  I realize, as all should, that a promise to pay fiat confetti, and the fiat confetti itself, are both built on the same value-system, and are both affecting balance sheets in the same way.  It's that "artificial" adjustment of the balance sheets of the country with a fiat currency that gives us long-term debasement, inflation, will to spend/save, etc...

This is the easiest example I can give, but it seems to have failed in helping others, so maybe it's just me: If you were to wake up one morning as a retired man, and found out that your SHY fund had been liquidated for cash, how angry would you be?  Would you feel like you've lost much?  Would you change your purchasing decisions?  Would this have debased the savings of your neighbors?


Now, imagine that you woke up one day, and instead checked your account and there was an additional $100k of 1 year treasury bills in there by accident, issued by the federal gov't.  How would you feel about that compared to the other situation?  Would you change your spending decisions?  Would you feel like your neighbors savings have been debased if you were the only one that got the money?

Clearly, the latter situation fundamentally changed how you view your finances, while the first appeared to be some kind of minute clerical error that didn't affect your balance sheet, and maybe cost you a few bucks in interest.

The latter is what happens when the government spends... the former is QE...

[MachineGhost]

MTT says that Treasuries are a savings instrument for the private sector — no different than a government CD. And in fact, purchasing Treasuries does not decrease money in the private sector. We don't feel poorer or spending-constrained when Harry Browne tells us to put 50% of our money into Treasuries. You can even have all of your cash in a Treasury money market fund and have all the check-writing privileges of a bank checking account.

Maybe I phrased that wrongly.  What I meant is that if the Public parks its capital into Treasury securities as a "government savings account", doesn't that decrease the flow of private sector funds available towards capital investment, R&D, etc.?  That is how I understand the traditional competition of government borrowing crowding out private sector investment.  And if that is still indeed true under MMT, doesn't that imply that Congress still has ultimate control of and directs those "savings" instead of the Public, i.e. a net wash from the Treasury's perspective?

MG

[MachineGhost]

When you fully absorb that at its very base, effective taxation and productive capacity, not something real and tangible, is giving our currency value, then it's easier to see that government paper is simply the monetary freeway on which we transact commerce, not something that directly increases wealth in our society.  It eventually became clear to me that in this world treasury bonds are really not fundamentally different than the fiat cash itself.  Both of them are purchasing power dreamt up by government... one just happens to look more liquid than the other.  I realize, as all should, that a promise to pay fiat confetti, and the fiat confetti itself, are both built on the same value-system, and are both affecting balance sheets in the same way.  It's that "artificial" adjustment of the balance sheets of the country with a fiat currency that gives us long-term debasement, inflation, will to spend/save, etc...

But, that assumes Congress can never first direct the created money into any productive capacity.  That is clearly false on an empirical basis, even if we are loathe to admit it.  A problem with Libertarians or most Republicans is they won't acknowledge that Congress can ever finance anything productive.  If that really was not the case, then we would have consistent high inflation all the time because the Federal Reserve can either decide on tight credit or high inflation, but not both.  And since we've obviously had both easy credit and low inflation since 1980 or so, it must suggest that Congress has some control over its spending relative to the inflaton equation.  Now if that is due to deficit hawks and moving the political center to the right under Reagan, they collectively provide an interesting check and balance to inflation.  If they all converted to the MMT dogma, we'd be in a world of hurt.

I fear that MMT almost makes statism a fait accompli.  We can't say the government is just providing the infrastructure of a medium of exchange when Congress is first directing the spending, which implies Politiburo control over the commanding heights of the economy!  It's not like the Treasury is just creating the money based on the inflation equation (where population growth is rolled into productive output) and giving it to the Public to grease the wheels of commerce.

Madness!

MG

[Gumby]

What I meant is that if the Public parks its capital into Treasury securities as a "government savings account", doesn't that decrease the flow of private sector funds available towards capital investment, R&D, etc.?

The demand for Treasuries represents the private sector's desire to save. As long as their is a desire to save, there will be a demand for Treasuries. Let's say you get a check from the Treasury. You might invest it in the stock market, in which case your money just goes from your bank account to the bank account of the person or company who sold you the shares. If you put the money in a money market fund, you've actually just purchased commercial paper with cash, in which case the person who sold you the commercial paper just deposited your cash into their own bank account. Whether you invest the money or use it to buy a cup a coffee, the money is always going to live in a bank account somewhere. It just bounces around from bank to bank. When banks have excess reserves (from too much government spending) the bank actually wants to invest those excess reserves in risk-free Treasuries. The only reason those excess reserves exist in the first place is because the Treasury put them there by spending money into existence. And, again, Treasuries are so liquid that they don't constrain anyone from investing in private investments. If you suddenly got the urge to invest in a private corporation, you could exchange your Treasuries instantly for cash that can be invested in whatever you like. Primary Dealers are required to make a market for Treasuries. And draining excess reserves from the banking system doesn't make Treasuries any less liquid. Treasuries are just a risk-free place to park excess reserves.

And if that is still indeed true under MMT, doesn't that imply that Congress still has ultimate control of and directs those "savings" instead of the Public, i.e. a net wash from the Treasury's perspective?

I don't follow that logic. Treasuries are extremely liquid. Nothing is stopping anyone from instantly converting Treasuries into cash to invest in the private sector.

[MachineGhost]

I don't follow that logic. Treasuries are extremely liquid. Nothing is stopping anyone from instantly converting Treasuries into cash to invest in the private sector.

My logic was that if the Public does not see any place to investment and parks it Treasury securities, doesn't Congress then decide it knows best and spends that savings anyway just as if the Treasury never sold the securities to the Public in the first place?  That seems like throwing good money after bad i.e. Japan with its postal savings bonds.  So what does MMT have to say about that kind of malinvestment?

MG

[Gumby]

My logic was that if the Public does not see any place to investment and parks it Treasury securities, doesn't Congress then decide it knows best and spends that savings anyway just as if the Treasury never sold the securities to the Public in the first place?

Yes, but a fiat government is going to spend on whatever it needs to spend on, regardless if those bonds exist or not.

MMT recognizes that, operationally, a fiat government never actually uses money it takes in for spending. Fiat governments just destroy any money that they collect. When you write a check to the Treasury, the government literally deletes money from your bank account. When the government spends money, it simply credits money into your bank account. It's all done with a few keystrokes. It's just as easy for the Treasury to add $1 billion into your bank account as it is to add $10 to your account.

Therefore, MMT recognizes that the money that goes into Treasury Bonds isn't actually the same money that is then spent by the government. And, in fact, that's true. Whether you own a Treasury bond or cash, both are just forms of currency that were created out of thin air by the government. The money that goes into the Treasury Bonds is simply green paper (cash) exchanged for blue paper (bonds). Having lots of blue paper is no different than parking money in your bank's savings account. In other words, the money you park in Treasury Bonds is still yours to spend anytime you wish (thanks to the high liquidity of the Treasury market).

You can even write a check from your Treasury Money Market Fund and someone else can deposit that check in their own Treasury Money Market Fund. The entire transaction would take place seamlessly.

And technically, there is no reason for a fiat government to ever issue bonds. Treasury Bonds are just a relic of the gold standard era, when we needed to borrow money in order to keep our currency convertible to gold. Now that the convertibility no longer exists, there's no need to borrow any money. But, Congress never changed the laws, so everyone thinks we still borrow — even though the government is just going through the motions of "borrowing" the money it already spends into existence.

It's easier if you just think of Treasury Bonds as another form of our currency. For instance, here's an interesting perspective of fiat currency from none other than Thomas Edison in 1921:

If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good...It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either....  If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper.  Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency… instead of the bankers receiving the benefit of the people’s credit in interest-bearing bonds?”?
Thomas Edison, quoted in NY Times, Dec. 6, 1921

That seems like throwing good money after bad i.e. Japan with its postal savings bonds.  So what does MMT have to say about that kind of malinvestment?

MMT recognizes that politicians need to be smart about what they spend money on. But, that is true of any economic theory. If politician makes dumb decisions, that's not a failure of MMT's descriptive fundamentals — that's just a failure of government.

Again, in a fiat government, the money parked in bonds isn't being spent by the government. A fiat government is creating all of its bonds and cash out of thin air. There's no "borrowing" or "revenue" in a fiat world. Everything is printed. The funds for spending always exist. There are no physical constraints.

MMT just exposes the operational realities of how the government is able to maintain its fiat power and spend without any constraints. Treasury auctions are purposefully designed not to fail. The government currently does this by always making sure the excess cash reserves to buy Treasury bonds already exist in the private sector — either from previous government spending or short term Fed loans — before the Treasury auctions take place.

[stone]

The extent to which MMT agrees with that is in terms of the "price" of money (ie interest rates) not the amount of money directly. MMT says that the "government sector" (ie central bank + treasury) can set interest rates but that private sector lending depends entirely on whether banks choose to create credit out of thin air because they consider there are credit worthy borrowers out there.  Clearly if interest rates are high, thanks to lots of treasuries having been sold, banks may be less likely to consider that borrowers will be able to service debt and so not lend. BUT often banks will simply not lend because they do not see any credit worthy borrowers even with negligible interest rates. That is pretty much the situation now.

MMTers believe that it is taxation that "crowds out" private sector spending and so creates an employment gap from which the government can hire. That is the point where I call BS on MMT. To my mind it all depends on what is being taxed. If the taxation does not reduce private sector spending, then I don't see how that could come about. I don't see that an asset tax would reduce private sector spending.

  What I meant is that if the Public parks its capital into Treasury securities as a "government savings account", doesn't that decrease the flow of private sector funds available towards capital investment, R&D, etc.?  That is how I understand the traditional competition of government borrowing crowding out private sector investment.  And if that is still indeed true under MMT, doesn't that imply that Congress still has ultimate control of and directs those "savings" instead of the Public, i.e. a net wash from the Treasury's perspective?

[Gumby]

To my mind it all depends on what is being taxed. If the taxation does not reduce private sector spending, then I don't see how that could come about. I don't see that an asset tax would reduce private sector spending.

Well, supposedly people are more likely to spend when they feel wealthy. Irrational exuberance, if you will. If the asset tax made people feel less wealthy, I would think it could cause people to spend less. Furthermore, I would think one might be less likely to purchase that second or third home, or second yacht, for fear of causing more assets to be taxed.

[stone]

Gumby do you mean less likely to take on debt inorder to buy the yatch? I agree that that would be true and I think of that as being a beneficial consequence. If you meant less likely to use cash to buy a yatch then I don't understand that since the cash would be taxed just as much as the yatch. If you mean people would turn down paid work so as to avoid getting any savings so as to avoid paying tax, well there is currently a shortage of work. Other people who needed the money to spend would take the work.

I actually think moving the tax burden to being an asset tax would result in more private sector jobs and spending being created. It would be tax advantaged to spend excess savings on investment in the economic sense rather than on buying pre-existing assets. If investment was to develop a new technology, then between hiring staff and actually getting the new technology up and running, there wouldn't be much of an asset to tax. Currently it is tax advantaged to hoard pre-existing assets rather than to create new ones.

[MachineGhost]

The extent to which MMT agrees with that is in terms of the "price" of money (ie interest rates) not the amount of money directly. MMT says that the "government sector" (ie central bank + treasury) can set interest rates but that private sector lending depends entirely on whether banks choose to create credit out of thin air

I vaguely remember reading something like that, where the quantity of money didn't have any relation to the cost of it or vice versa.  Must have been the Monetarism experiment in the 70's.

MMTers believe that it is taxation that "crowds out" private sector spending and so creates an employment gap from which the government can hire. That is the point where I call BS on MMT. To my mind it all depends on what is being taxed. If the taxation does not reduce private sector spending, then I don't see how that could come about. I don't see that an asset tax would reduce private sector spending.

Eh, that sounds like B.S. to me also.  If taxation had that much a dramatic effect on tax revenues collected out of the private sector, then such would not average a steady 20% of GDP or so despite varying different tax regimes.  Can MMT stand up that empirical fact?

It also sounds like MMT is majorly missing the mark on the interest that is owed to the debtholders.  At some point, the interest payments are going to swamp the principal.  No amount of newly created money can outpace exponetial growth or it would result in hyperinflation.  I just checked the US Debt Clock and so far we're paying 3.7 trillion in interest on 56.5 trillion of debt.  So I guess we got a way to go before the SHTF.

MG

[stone]

MG, MMTers say that as more treasury debt accumulates, interest rates will get pushed down because the interest will get spent on bidding up the price of the bonds. They say that so long as the real rate of interest is lower than the growth in GDP, the debt interest payments will remain manageable. As a proportion of GDP, treasury debt interest payments for the USA are now lower than they were in the early 1980s. MMTers advise a zero interest rate policy anyway.

I guess MMTers would say that tax revenues remain constant because as the government taxes, it creates an employment gap that it then fills with government employees (or private employees servicing the government) and those jobs themselves get taxed.

[Gumby]

It also sounds like MMT is majorly missing the mark on the interest that is owed to the debtholders.  At some point, the interest payments are going to swamp the principal.  No amount of newly created money can outpace exponetial growth or it would result in hyperinflation.  I just checked the US Debt Clock and so far we're paying 3.7 trillion in interest on 56.5 trillion of debt.  So I guess we got a way to go before the SHTF.

A lot of your initial confusion and questions are answered in Waren Mosler's Seven Deadly Innocent Frauds of Economic Policy:

http://moslereconomics.com/wp-content/p ... s/7DIF.pdf

With respect to interest rates, Mosler recommends that the Treasury be allowed to sell Treasuries directly to the Fed (like Japan does), and then simply stop issuing longer Treasuries altogether. When a government is fiat, there is no need to issue bonds in the first place.

Interest Rates and Monetary Policy

It is the realm of the Federal Reserve to decide the nation's interest rates. I see every reason to keep the "risk free" interest rate at a minimum, and let the market decide the subsequent credit spreads as it assesses risk.

Since government securities function to support interest rates, and not to finance expenditure, they are not necessary for the operation of government. Therefore, I would instruct the Treasury to immediately cease issuing securities longer than 90 days. This will serve to lower long-term rates and support investment, including housing. Note, the Treasury issuing long term securities and the Fed subsequently buying them, as recently proposed, is functionally identical to the Treasury simply not issuing those securities in the first place.

I would also instruct the Federal Reserve to maintain a Japan like 0% fed funds rate. This is not inflationary nor is it the cause of currency depreciation, as Japan has demonstrated for over 10 years. Remember, for every $ borrowed in the banking system, there is a $ saved. Therefore, changing rates shifts income from one group to another. The net income effect is zero. Additionally, the non government sector is a net holder of government securities, which means there are that many more dollars saved than borrowed. Lower interest rates mean lower interest income for the non-government sector. Thus, it is only if the borrower's propensity to consume is substantially higher than that of savers does the effect of lower interest rates become expansionary in any undesirable way. And history has shown this never to be the case. Lower long term rates support investment, which encourages productivity and growth. High risk-free interest rates support those living off of interest payments (called rentiers), thereby reducing the size of the labor force and consequently reducing real national output.

The Role of Government Securities

It is clear that government securities are not needed to "fund" expenditures, as all spending is but the process of crediting a private bank account at the Fed. Nor does the selling of government securities remove wealth, as someone buying them takes funds from his bank account (which is a U.S. financial asset) to pay for them, and receives a government security (which is also a U.S. financial asset). Your net wealth is the same whether you have $1 million in a bank account or a $1 million Treasury security. In fact, a Treasury security is functionally nothing more than a time deposit at the Fed.

Nearly 20 years ago, Soft Currency Economics was written to reveal that government securities function to support interest rates, and not to fund expenditures as generally perceived. It goes through the debits and credits of reserve accounting in detail, including an explanation of how government, when the Fed and Treasury are considered together, is best thought of as spending first, and then offering securities for sale. Government spending adds funds to member bank reserve accounts. If Govt. securities are not offered for sale, it's not that government checks would bounce, but that interest rates would remain at the interest rate paid on those reserve balances.

In the real world, we know this must be true. Look at how Turkey functioned for over a decade - quadrillions of liras of deficit spending, interest rate targets often at 100%, inflation nearly the same, continuous currency depreciation and no confidence whatsoever. Yet government "finance" in lira was never an issue. Government lira checks never bounced. If they had been relying on borrowing from the markets to sustain spending, as the mainstream presumed they did, they would have been shut down long ago. Same with Japan – over 200% total government debt to GDP, 7% annual deficits, downgraded below Botswana, and yet government yen checks never bounced, and 3-month government securities fund near 0%. Again, clearly, funding is not the imperative.

The U.S. is often labeled "the world's largest debtor." But what does it actually owe? For example, assume the U.S. government bought a foreign car for $50,000. The government has the car, and a non-resident has a U.S. dollar bank account with $50,000 in it, mirroring the $50,000 his bank has in its account at the Fed that it received for the sale of the car. The non-resident now decides that instead of the non-interest bearing demand deposit, he'd rather have a $50,000 Treasury security, which he buys from the government. Bottom line: the US government gets the car and the non-resident holds the government security. Now what exactly does the U.S. government owe? When the $50,000 security matures, all the government has promised is to replace the security held at the Fed with a $50,000 (plus interest) credit to a member bank reserve account at the Fed. One financial asset is exchanged for another. The Fed exchanges an interest bearing financial asset (the security) with a non-interest bearing asset. That is the ENTIRE obligation of the U.S. government regarding its securities. That's why debt outstanding in a government's currency of issue is never a solvency issue.

Source: Seven Deadly Innocent Frauds of Economic Policy