2012 performance

[moda0306]

I think the thing preventing LW's argument from holding water is if the fed is legally obligated to ensure auctions succeed, as are the member banks, this single fact completely transforms the nature of the system from what LW describes it and takes away a ton of power from the fed and spreads it to the treasury.  This means the treasury's account at the fed is an accounting gimmick.  This means that treasury bonds and taxes simply are not funding mechanisms in any true manner.  To say the fed holds all the power is misleading.  The entire point of the fed is to ensure a stable payments system.  I believe the treasury actually has some statutory authority over the fed if push comes to shove.  The treasury is NOT just another player in the game.  It has no limitations in its ability to spend, and the fed has to accommodate that, making the account balance completely irrelevant to both the govt sector and private sector. This also makes treasury bonds simple savings accounts at the fed.  Investors actually expect the treasury to pay this debt irrespective of taxation or borrowing... It's not just something they shrug their shoulder at, much less dislike.

[Xan]

Though, I wouldn't say he's been trying to understand it. He's just trying to refute it.

If we're approaching this scientifically, as in, testing hypotheses to see whether they match up with reality, then the only way to become more certain that one is correct is to thoroughly attempt to refute it.

[Gumby]

Though, I wouldn't say he's been trying to understand it. He's just trying to refute it.

If we're approaching this scientifically, as in, testing hypotheses to see whether they match up with reality, then the only way to become more certain that one is correct is to thoroughly attempt to refute it.

That's all well and good, but A) it's not a hypothesis. MMT and MMR are economic frameworks for describing fiat currency — much like Keynesian economics or Austrian economics are not a hypothesis, but rather economic frameworks or schools of thought for describing the economy. It's not easy to prove or disprove a school of thought. And... B) LW has been trying to refute MMT/MMR for about a year now and keeps misunderstanding it. And it seems like he really doesn't want to understand it. And furthermore, the MMT framework has been around since the 1940s, and to my knowledge it hasn't been refuted yet.

[Gumby]

I've never seen a check from the US Treasury bounce.

Yes. That's because they can't bounce a check. It's impossible with the way the government's computers are currently programmed. As McMillin explained in the quote above, the computers are programmed to pay the private sector no matter what the balance of the Treasury's account is. It's not a traditional banking account in the way we think of.

Also, you still haven't addressed the question about what happens if everyone pays you some money every year but you never spend any money?  What then?  It could be LW, or it could be the Fed, or the Treasury, or whoever, but if you never spend that money, you might as well stick it in your mattress because it's out of circulation and deflationary.

Exactly. The money is no longer in the private sector in that example.

Here's how I understand it - please (anyone) correct me if I'm wrong:

Treasury: writes checks (government spending) and receives revenue (taxes).

That's true. Though the Treasury writes checks (government spending) and issues corresponding debt. The government doesn't need any revenue to go through those motions. It can write checks and issue debt as much as it wants to. The money to "fund" those debt auctions are funneled into the auctions by the Fed and Primary Dealers — and this serves as a reserve drain for excess reserves (which came from government spending).

Fed: Manages primary debt auctions and reserve accounts for all of the banks.

Yes. The Treasury technically holds the auction, but the Fed coordinates the transactions with Primary Dealers and the Treasury to make sure the auctions go off without a hitch.

Performs POMO when needed in coordination with the Treasury.

I could be wrong, but I don't think the Treasury needs to be involved with POMO. I believe it is just be between the Fed and Primary Dealers.

It seems to me that both can print money (in a sense).  The Treasury can print money simply by the fact that every check they write is automatically good - no risk of a bounced check.  The Fed can print money through QE.

Yes. Though, QE is really just lots of POMO. So, the Fed prints through POMO and repos — but these are really just swaps from the private sector's point of view.

[Lone Wolf]

Do you agree that if the government completely stopped spending money but kept tax rates at their current levels, it would be deflationary across the whole economy (assuming private sector credit was expanding at the same rate whether the government was spending money or not)?

With tax rates held at the same levels?  This is certain to yield a large economic contraction.  This would not be be due to an inability to expand the base money supply, though (since the Fed can expand the money supply by simply using existing US debt or other instruments.)  This is the reality of the pain involved in paying down debt, especially so rapidly.  It's the opposite of when you accumulate the debt.  The day I "accumulated" my mortgage I got a house.  Every day after that has yielded the pain in the butt of paying it down. 

The Treasury creates millions of dollars in base money every day... every time it spends money into existence!

So you actually believe that the Treasury creates base money?  Is this seriously something that MMT claims?  As for fundamental points that explain why we aren't agreeing, here's a biggie.

Money creation actually works as follows: "There are two principal stages of money creation. First, a central bank introduces new money into the economy (termed 'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions."  Source: http://en.wikipedia.org/wiki/Money_creation

As you used to know before MMT convinced you differently, the Central Bank creates money.  If you still don't believe this, I'm not sure what else to say except that once again MMT has not been helpful to your understanding.  If it gets this kind of basic fact wrong I'm afraid that we're an extremely long way from describing "operational reality".

When you write a check, if there isn't enough funds in your account, it bounces.  I've never seen a check from the US Treasury bounce.

Bingo.  Has the Treasury's account at the Fed ever been overdrawn?  Absolutely not.  If more funds are needed, the Treasury will auction off new debt before its account reaches zero.  Taxes and debt auctions are the only ways in which this account can be replenished.  These are not the actions of an entity that is "spending money into existence".

A negative balance in this account would be completely uncharted, very dangerous territory.  US Treasury checks are never supposed to bounce because this account, which is only filled by taxes and debt auctions, is never supposed to reach zero.

The moment that the Treasury writes a check when its account balance is negative is the moment when it starts "creating base money" (as Gumby incorrectly believes it can do.)  The day that this happens I will return to this thread, issue a public retraction, then print out Warren Mosler's paper and eat it page by page.  I will do so without wearing a stitch of clothing.

That's all well and good, but A) it's not a hypothesis. It's just a framework for describing fiat currency. And... B) LW has been trying to refute MMT/MMR for about a year now and keeps misunderstanding it. And doesn't seem to want to understand it.

Relax.  We're just a couple of dilettantes disagreeing about a dull subject.  What's with the endless personal stuff?  It can't possibly be this emotionally wrenching for you to have one guy pushing back skeptically all by himself against an entire crowd of MMT devotees.

[moda0306]

LW,

That disasterous negative treasury account will never happen as long as the fed does its job.  This Fundamentally changes the arrangement, as the fed HAS to keep it positive.  It has the tools to do so... Therefore, the account is irrelevant.  HB knew this. 

Further, bonds are money.  Since the fed can only trade one financial asset for another, and financial assets are very much relevant forms of money, the fed really doesn't have some insane power that you ascribe to it.  The treasury, however, since it knows the fed is obligated to ensure it has a balance, and this makes t-bills as good as cash, is the one with the power to truly change the money supply.  Especially when you consider that the fed very rarely buys anything but tbills.

[moda0306]

To go another step further, the fed only ever could have gotten people to send them their assets if the fed sent them something of value in return.  A promise of convertability was the glue that held the arrangement together.  We no longer have that.  Now we basically have a fed whose reserves have no convertibility to give their cash value.  Taxes are now what accomplishes that... So really all the fed has the power to do is trade different forms of money with banks, while our treasury actually adds and subtracts financial assets (money) from the system.

The fed is no longer the currency issuer, as their assets the trade with the private sector aren't trading promises to pay gold for gold itself, they're trading the base currency (given value by taxes) for treasury financial assets denominated in the base currency (given value by taxes).  It is simply a completely different arrangement than accounting identities would have us believe.

[LNGTERMER]

Quote from: Storm on Today at 12:30:42 PM
Here's how I understand it - please (anyone) correct me if I'm wrong:

Treasury: writes checks (government spending) and receives revenue (taxes).

That's true. Though the Treasury writes checks (government spending) and issues corresponding debt. The government doesn't need any revenue to go through those motions. It can write checks and issue debt as much as it wants to. The money to "fund" those debt auctions are funneled into the auctions by the Fed and Primary Dealers — and this serves as a reserve drain for excess reserves (which came from government spending).

Gumby,
Can you elaborate on this. If for example the treasury needs to $100 then what happens?
Does it:
A- issue 100 Tbills wait till Auction for its account to be credited with base money by primary dealers
B - Issue 100 Tbills wait till Auction for its account to be credited with base money by primary dealers
    AND
    Write a check for $100 so that whoever it was issued to can exchange it for $100 printed by the FED?

If B is correct then I think you and LW are both sort of correct.
If not count me with the confused group.

[Storm]

When you write a check, if there isn't enough funds in your account, it bounces.  I've never seen a check from the US Treasury bounce.

Bingo.  Has the Treasury's account at the Fed ever been overdrawn?  Absolutely not.  If more funds are needed, the Treasury will auction off new debt before its account reaches zero.  Taxes and debt auctions are the only ways in which this account can be replenished.  These are not the actions of an entity that is "spending money into existence".

I suppose it's hard to know which is really true without looking at the account statements.  Does the Treasury make their account statements public?  Perhaps that would answer everyone's questions once and for all.

Here is what I understand the difference in your position is:

Gumby: The treasury checking account is bottomless and government can write any check it wants, without fear of it bouncing.

LW: The treasury checking account must be replenished with money from taxes and primary auctions.  If, for some reason people stopped paying their taxes and nobody wanted bonds, checks would start to bounce.

Personally, I have a hard time believing the Fed would ever let a check bounce, regardless of the balance of the account, but the difficulty here is that it's like the Fed is playing 3 card monty and LW says "see, the card face down is a Queen."  Gumby says "no it's not," but nobody is turning over the card so for all we know it could be joker.

Any public records available?

I have to say, regardless of the minutia of how the account is managed, running a budget surplus would have to be deflationary, and running deficits would have to be inflationary.  That is the fundamental thesis of MMT/MMR and I don't think Gumby or LW would disagree, so I'm not sure what the hang up is.

What really bothers me about the system is how politicians get so worked up into a frenzy of trying to balance the budget in the midst of a global recession.  It's frankly ridiculous - the cap proposal that the House wanted to do which would cap the budget and literally force the Fed to bounce checks was crazy talk.  Actually, I believe one of the objections the Fed had there was that they said their computer systems were not even programmed to do this, and it would take literally years to reprogram the systems to allow a dollar limit to be placed on expenditures.

[Lone Wolf]

I suppose it's hard to know which is really true without looking at the account statements.  Does the Treasury make their account statements public?  Perhaps that would answer everyone's questions once and for all.

That would be terribly interesting.  One should find that the Treasury never, even once spent money while its Fed account balance was negative.  (My previous post elaborates on just how much I have riding on this.) 

The bottom line is that for all the MMT assertions that the Treasury "spends money into existence", we have not only accounting but actual behavior that is precisely the opposite.

Every dollar that the Treasury has ever spent was matched with a dollar that it previously received in taxes or borrowed from the public.  There are simply no exceptions to this rule.  The balance of this account also reflects this relationship -- taxes received and money borrowed first, and always in amounts ahead of what is being spent.  Doesn't this strike you as odd for an entity that is supposed to be "spending money into existence"?

Can you understand how this sort of thing is virtually impossible for a skeptic to swallow?

LW: The treasury checking account must be replenished with money from taxes and primary auctions.  If, for some reason people stopped paying their taxes and nobody wanted bonds, checks would start to bounce.

The first sentence is accurate but the second is inaccurate.  Auctions are rigged to avoid embarrassing, catastrophic failure.  Primary dealers are required to make a good faith run at every Treasury auction to ensure that it doesn't totally flop.

So while the Treasury of course does not "spend money into existence", it does have the ability to make sure that some investor somewhere will lend it the money that it requires.  (At what interest rate is a different issue entirely.)

[Gumby]

So you actually believe that the Treasury creates base money?  Is this seriously something that MMT claims?

Yes. And it's true. The Treasury's website backs this up.

Currency notes and coins are all produced by the Treasury Department. After production, the Treasury ships the coins and currency notes directly to Federal Reserve banks and branches. The Federal Reserve then releases them as required by the commercial banking system.
Source: http://www.treasury.gov/about/education ... ution.aspx

Fiscal policy determines the amount of new money and savings directly created by the federal government. Deficit spending is the direct creation of new money and savings for the private sector. When the federal government spends and "borrows," a deposit in the form of a treasury security is created in the private sector. The national debt (~$15 Trillion) is essentially equal to all of the new money directly created by fiscal policy. Most of that money is soon converted into risk-free Treasuries as a reserve drain. When the Fed needs to create base money in the way that you describe, it swaps base money for those Treasuries that were created. So, the private sector gains wealth whenever Treasuries are issued and the money is spent into the private sector (to eventually buy those Treasuries). The Treasury also creates physical base money (as paper bills and coins) and then ultimately creates the private sector's risk free savings with every Treasury it creates. And the Fed then goes ahead and swaps those Treasuries as needed. In other words, only the Treasury can create net financial assets.

As for fundamental points that explain why we aren't agreeing, here's a biggie.

Money creation actually works as follows: "There are two principal stages of money creation. First, a central bank introduces new money into the economy (termed 'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions."  Source: http://en.wikipedia.org/wiki/Money_creation

As you used to know before MMT convinced you differently, the Central Bank creates money.  If you still don't believe this, I'm not sure what else to say except that once again MMT has not been helpful to your understanding.  If it gets this kind of basic fact wrong I'm afraid that we're an extremely long way from describing "operational reality".

Lone Wolf... That example is just explaining POMO asset swaps and short term loans. The Fed can only do an asset swaps and loans. Those transactions don't affect net financial assets in the private sector. I've explained this to you a dozen times, but you seem to keep forgetting. Wikipedia is describing the most basic monetary operation — not any fiscal operation. In the example you've cited, the government is bankrupt and can't buy an aircraft carrier until someone decides to loan the government money. That's not how it works in the real world. We are a fiat nation. The Treasury writes fiscal spending checks every day and the private sector winds up with a net deposit a Treasury Bond while base money goes round and round in and out of the Treasury "account". It doesn't matter if the Treasury has the money or not. If they don't have the money, they just issue more Treasury bonds and then the Fed helps target the reserves to "fund" those auctions. It's kind of like a heart — base money is the blood that keeps getting recycled. But, only Congress (through the Treasury) can increase or decrease the amount of net financial assets in the private sector. As the Treasury spends money, it causes bank reserves to grow. The Fed and Treasury work together to drain those reserves and convert them into Treasury bonds over time (hence the net deposit in the private sector as a Treasury security). This is how the private sector's savings grow.

The Fed cannot "grow" net financial assets in the private sector. It doesn't have the authority to do that.

Has the Treasury's account at the Fed ever been overdrawn[/b]?  Absolutely not.  If more funds are needed, the Treasury will auction off new debt before its account reaches zero.  Taxes and debt auctions are the only ways in which this account can be replenished.  These are not the actions of an entity that is "spending money into existence".

You are correct that the balance will never reach zero. My only point is that this isn't a typical bank account in the way you imagine. The "account" is really a spreadsheet. Anyway, as I explained above, the Treasury is creating net financial assets — something I've explained to you over a dozen times, but you've never acknowledged for some reason.

That's all well and good, but A) it's not a hypothesis. It's just a framework for describing fiat currency. And... B) LW has been trying to refute MMT/MMR for about a year now and keeps misunderstanding it. And doesn't seem to want to understand it.

Relax.  We're just a couple of dilettantes disagreeing about a dull subject.  What's with the endless personal stuff?  It can't possibly be this emotionally wrenching for you to have one guy pushing back skeptically all by himself against an entire crowd of MMT devotees.

I have a flight tomorrow and honestly its been exhausting to explain these points over and over and over again while you go after straw men as an attempt to disprove MMT/MMR — as if a 70 year old monetary framework could be debunked by looking up "Money Creation" on Wikipedia. I don't mean to be an ass about this — and I apologize if I am sounding like one — but you're not even trying to understand the difference between the private sector and the public sector.

If you aren't willing to attempt to understand these concepts, I'm afraid we are going to keep going in circles here. And I'm running out of time. Again... sorry for any comments that came off the wrong way.

[Lone Wolf]

So you actually believe that the Treasury creates base money?  Is this seriously something that MMT claims?

Yes. And it's true. The Treasury's website backs this up.

Currency notes and coins are all produced by the Treasury Department. After production, the Treasury ships the coins and currency notes directly to Federal Reserve banks and branches. The Federal Reserve then releases them as required by the commercial banking system.
Source: http://www.treasury.gov/about/education ... ution.aspx

I'd assumed it was clear that I was excluding physical currency.  I'd dropped to shorthand after repeating this so many times.  Perhaps I should have maintained the more precise wording.

My more precise question is then: "So, you actually believe that the Treasury creates base money outside of coins and bills?  Is this seriously something that MMT claims?"

[MediumTex]

So you actually believe that the Treasury creates base money?  Is this seriously something that MMT claims?

Yes. And it's true. The Treasury's website backs this up.

Currency notes and coins are all produced by the Treasury Department. After production, the Treasury ships the coins and currency notes directly to Federal Reserve banks and branches. The Federal Reserve then releases them as required by the commercial banking system.
Source: http://www.treasury.gov/about/education ... ution.aspx

I'd assumed it was clear that I was excluding physical currency.  I'd dropped to shorthand after repeating this so many times.  Perhaps I should have maintained the more precise wording.

My more precise question is then: "So, you actually believe that the Treasury creates base money outside of coins and bills?  Is this seriously something that MMT claims?"

Perhaps they should say "the government" creates base money, since the Fed is essentially just another branch of government.

Does it matter if the Fed and Treasury, together, do something that the Treasury couldn't do alone?

Isn't the important element whether new money is coming "out of thin air", or from somewhere else?

I don't know the answers to these questions--i.e., I'm not fishing for some particular answer.

[melveyr]

I feel like Lone Wolf is really stressing the order of operations.

The MMT guys would say that it doesn't matter and most MMT guys think of the Treasury/Fed as a single entity for their models. I agree with combining them, for practical modeling. But I think LW is raising some good points and he deserves a chance to get his queries answered.

Okay, so let's assume that the Treasury does not print literal paper bills or anything like that because that has been a source of confusion, and is generally immaterial in the grand scheme of things.

:Starting Point:
The Treasury has $1,000 dollars in its account at the Fed.
The Banks have $500 dollars in their checking accounts at the Fed.
The Fed declares that its target interest rate is 10%.

1.
The Treasury offers a 1 year note with a $100 face value and a $10 coupon.
The banks know that they can sell this to the Fed whenever they want for $100 because of the Fed's interest rate policy.
The banks buy the bonds for $99.999999999 and sell to the Fed for $100 a small profit (hardly material because of the extreme amounts of competition).

2.
Now the Treasury has $1,099.999999 in its account.
The Banks have $500.0000000001 in their account. In the grand scheme of things, this did not make a material impact on their balance sheets.

3.
Next the Treasury decides to spend some money, and for simplicity sake they decide to sell proceeds from the bond auction.
Treasury spends the $99.9999999999. It ends up in the Banks.
Now the Banks have $600 dollars in their account.

:Conclusions:
It was the government spending that really had an impact on the the banks balance sheets. It is government spending that boosts net financial assets for the private sector. This is the real take-away from MMT/MMR. When you look at the Fed, they can only really change the composition of balance sheets. Yes there is some effect because the banks are only going to transact at a price they deem reasonable, but I think this example illustrates that fiscal policy is much more powerful than monetary policy. Also, the Fed primarily acts through the Treasury market. In many ways, the Treasury creates the inventory and the Fed trades the inventory. They are very much linked. Also it is very important to keep in mind that all of the Fed's profits go back to the Treasury. They are essentially married.

Is this agreeable LW? Fleshing these things out into scenarios has helped me. I think tracking the stocks and flows can lead to interesting results.

EDIT: Another thing to noodle on... Every asset created in the private sector has a corresponding liability.

However, when the government creates a Treasury bond, it is an asset of the private sector and the corresponding liability falls on the government, NOT within the private sector. This is huge. The private sector has a demand for net financial assets that only the government can fulfill through deficit spending.

[Gumby]

So you actually believe that the Treasury creates base money?  Is this seriously something that MMT claims?

Yes. And it's true. The Treasury's website backs this up.

Currency notes and coins are all produced by the Treasury Department. After production, the Treasury ships the coins and currency notes directly to Federal Reserve banks and branches. The Federal Reserve then releases them as required by the commercial banking system.
Source: http://www.treasury.gov/about/education ... ution.aspx

I'd assumed it was clear that I was excluding physical currency.  I'd dropped to shorthand after repeating this so many times.  Perhaps I should have maintained the more precise wording.

My more precise question is then: "So, you actually believe that the Treasury creates base money outside of coins and bills?  Is this seriously something that MMT claims?"

Well, not exactly. I know I might have been casual by saying the Treasury is "printing" but if I can clarify, the statement is really meant to refer to the printing of net financial assets (not exactly minting brand new electronic base money). I apologize if I was being too cavalier with the technicalities. To clarify... electronic base money is being introduced and removed from the private sector's reserve accounts as the Congress intends. But, you are correct that the spreadsheet needs to balance, by law. And you are correct that the base money to buy the government's Treasuries had to be put into the hands of the private sector in advance. The initial base money may either come from the Fed swaps or the Treasury (when it mints paper and coins). When our currency was backed by gold, people would bring their gold to the government and the Treasury would write checks to give to those miners. The newly issued money would become deposits at the Fed. Remember, Fort Knox is under the supervision of the Treasury department. But, the important thing to remember is that when the Fed is printing base money, the Fed is only doing short term loans or swaps with the private sector — usually for Treasuries. So, the Treasury debt is where the assets to create base money comes from.

At the end of the day, our money supply would not exist if it weren't for Treasury debt.

My point about the Treasury account is that it's not like a normal bank account (though it certainly looks like one). In other words, if the balance sheet ever went negative (and something went terribly wrong) the Treasury and the Fed would literally need to recode their machines to stop the creation of base money into the private sector's bank accounts in a timely fashion. You are correct that the Treasury shouldn't really be creating base money, but that's likely how the computers are adding money into reserve accounts at the Fed.

The only reason Warren Mosler claims this is the case is because he says the Treasury, on multiple occasions, accidentally deposited a million dollars or so into his fund's account every once in a while and the Treasury guys would call him after a few days and tell him how the computers made a mistake and it needed to be fixed. As it was explained to him by the officials, the Treasury's mistakes didn't come from the kind of traditional bank account that we know of — they were just accidental keystrokes that seemed to have no affect on the Treasury's officially published balance sheet. The Treasury guys would tell him how the machine worked and that they needed to delete the money...and he'd watch it disappear before his eyes in real time. Or something like that. He talks about it in a video that was posted here a few months ago. I agree this is just a different opinion on the "operational reality" but it makes sense to me. If you had a government that needed to make 3 million transactions a day, you'd probably have a few floors of mainframes at your central bank devoted to keeping payments moving in real time no matter what, and then doing everything you could to keep the balance sheet from failing on a totally different floor.

So, anyway, when I pay my taxes, the money leaves the private sector. Yes, it's often spent again, but the main point is that only the Treasury has the ability to create or destroy net financial assets in the private sector. The Fed can't do that — particularly since it is usually swapping out Treasury debt or other forms of private credit when it creates base money. The Fed needs Treasury debt to make its monetary engine run without crossing the line into fiscal spending (which people have criticized it for and Bernanke has actually tried to stop).

[Gumby]

Perhaps they should say "the government" creates base money, since the Fed is essentially just another branch of government.

Well, I'm pretty sure that's what I usually say. I may have slipped up in this thread, but if you go to Warren Mosler's web page it says in bright red letter in the upper-right-hand-corner....

The funds to pay taxes and buy government securities come from government spending

Source: http://moslereconomics.com/

Which is correct since the private sector can't create its own base money.

Lone Wolf... you can probably just ignore what I said and let melveyr explain the parts I'm not doing a good job of explaining. I need sleep and I won't be able to respond tomorrow anyway! Sorry for all the confusion!

[Gumby]

Can you elaborate on this. If for example the treasury needs to $100 then what happens?
Does it:
A- issue 100 Tbills wait till Auction for its account to be credited with base money by primary dealers
B - Issue 100 Tbills wait till Auction for its account to be credited with base money by primary dealers
    AND
    Write a check for $100 so that whoever it was issued to can exchange it for $100 printed by the FED?

If B is correct then I think you and LW are both sort of correct.
If not count me with the confused group.

It's a bit more complicated than that. LW is correct that the Treasury can't legally spend until its balance sheet allows it to (though, the entire operation is designed to prevent that from happening, and the computers would need to be reprogrammed if it did). But, the Fed and Treasury have tricks that they use to keep the books balanced. Professor Scott Fullwiler explains here...

http://pragcap.com/mmt-and-the-operatio ... ary-system

[MachineGhost]

Sometimes I wonder if Gumby and moda are the one and the same person.

But wow, I think we all need to be a lot less sloppy with our use of terminology.

Claiming money is "destroyed" when it is merely a debit transaction in a bank account linked to a credit transaction on another bank account is misleading.  Any real destruction of money would occur at the IRS with physical currency or via retirement of worn currency at the Fed.  Literal destruction of electron money would make no sense as the federal debt would not be growing over time.

Claiming the Treasury creates "base money" is also problematic.  Only the Fed has that power and what it constitutes is defined in the Federal Reserve Act (essentially similar to internal SDRs at the IMF).  The Treasury can authorize the Bureau of Engraving and Printing to print up and issue currency, and it can also issue Treasury Bills, Notes and Bonds.  But only Congress has the power to determine the amount government spending that the Treasury can issue each Fiscal Year through the above two methods or literal checks/ACH transfers drawn on the Treasury's bank account with the Fed.  When the Fed creates new base money internally on its books ("quantitative easing"), it is of no practical use until it is swapped for Treasuries (or illegal bonds) or banks borrow directly from the discount window.  Essentially, all the Fed does is steer how much Treasuries or currency will be held by the public...  if it "monetizes the debt", then less Treasuries will be available to the public and so relatively less will be held vis a vis currency.

What seems to be in contention here is whether or not the Treasury's account at the Fed needs to be pre-funded before it can issue checks/ACH's that clear.  The ruckus over the debt ceiling debate last year seemed to indicate that the Treasury's account was going to go negative if more borrowing was not authorized by Congress, as the tax receipts were not sufficient to meet projected spending.  It seems to me that if the banks just park their "excess reserves" at the Fed during a recession, then there will be less debt-money available in the private economy to flow to the Treasury and there could be temporary solvency issues.

MG

[hoost]

All of our money does not come from debt.  If all of the debt that is currently carried on the fed's balance sheet went away, there would still be gold.

Hoost, I think it is far more accurate to say "if all of that gold that is currently carried on the fed's balance sheet went away, there would still be debt."  After 1970 gold was irrelevant to the fiat money system.

That's an interesting way to think about it.  So what if all of the gold did go away?  What do you think would happen?  I'm trying to run through scenarios in my head and the only thing I can picture is economic collapse.

I still think in people's minds, as often evidenced by things you hear and read, they think the dollar is backed by gold.  I guess in reality, it is backed by gold, but not tied to it at a fixed exchange rate.

Another question would be, what if the govt ran a balanced budget for the next 30 yrs and allowed all of its bonds to mature without issuing new ones?  I'm not interested in whether it's good or bad, just in what would actually happen?  I haven't thought it all the way through yet.

I picture deflation, i.e. the money becomes more valuable, gaining purchasing power, but how would that affect production?  Prices would be falling; instead of a false boom, I guess it would be a false bust.  People would cut production, thinking the demand was no longer there.  I guess if it was a slow deflation it would probably be good, but a rapid deflation a la current fed induced boom-busts would be pretty bad.

I love this forum.  I enjoy being able to exchange ideas and debate very interesting topics with other people who seem to share the same natural curiosity about the way things work that I do.  Thanks everyone for all of your contributions and for challenging me to look at things from multiple perspectives.  In the end, I think it helps all of us become more enlightened and thoughtful people and to understand the world even better.

As an aside, I was doing some research for this post and came across this http://www.newyorkfed.org/education/add ... dvault.pdf from the NY Fed.  It's pretty interesting, and now I forgot what I was trying to find in the first place.

[Lone Wolf]

The MMT guys would say that it doesn't matter and most MMT guys think of the Treasury/Fed as a single entity for their models. I agree with combining them, for practical modeling. But I think LW is raising some good points and he deserves a chance to get his queries answered.

Thanks for this thoughtful, meaty reply.  Now we're really getting somewhere.

The Treasury offers a 1 year note with a $100 face value and a $10 coupon.
The banks know that they can sell this to the Fed whenever they want for $100 because of the Fed's interest rate policy.
The banks buy the bonds for $99.999999999 and sell to the Fed for $100 a small profit (hardly material because of the extreme amounts of competition).

At this point, the Treasury has taken on a $100 liability.  The Treasury can only fulfill such an obligation via taxation or future borrowing.  (It seems that we're all now universally on the same page that the Treasury doesn't literally "spend money into existence" but let me know if you disagree.)

So we have the Treasury with a $100 liability and $100 in cash from the banks.  The banks have a new $100 T-bill asset.  It's clear that no new net assets have been created.

At this point, I think what you would tell me is that this is true but net financial assets have been created in the private sector while the liabilities are in the public sector.  However, we've established that there are only two possible ways for the Treasury to meet its $100 liability:

• Collect money in taxes from the private sector
• Borrow money from the private sector

That's the entire list.  Given the way in which these liabilities must be addressed, I can't justify the distinction whereby private assets matter but public liabilities don't.

The only way that I know of to create true net assets in the private sector is to actually create things.  When I rearrange a pile of scrap metal, rubber, and glass into a car that's a real asset that didn't exist before.  When I turn an unorganized rabble of software engineers into a multi-billion dollar company, I've created a real "net asset".

But when I borrow money no matter who I am, Treasury included, all I am able to do is create an asset and a corresponding liability.  Only the Federal Reserve can take an asset (any asset) and purchase it with money created out of thin air.  The Fed's ability to inject money into the economy is the completely unique element.

Isn't the important element whether new money is coming "out of thin air", or from somewhere else?

I completely agree.  This is why I insist that the Fed is the only truly special character in this play.  Their manipulation of the money supply matters a lot and they IMO have more than enough leverage to push this any way they see fit with existing Treasury debt.  Given that this is so, I see no evidence that we require Barack W. Bush levels of deficit spending in order to meet monetary needs.

[moda0306]

MG,

Sorry... totally different people. 

LW, MT, and others,

First off, LW, we know that REAL assets are the key to everything... MMR hammers on this constantly.  Financial assets are simply contracts with offsetting liabilities that grease the wheels of the creation of real wealth.  Can we agree on this?  One thing we may not agree on is that I (and others) think that you'll be much more likely to take the time to invest in the car or the startup if there's sufficient demand for your product/service... on an aggregate scale there is no such sufficient demand... but I digress.

I think what's screwing up some of the verbology here is how we refer to things as "money," "base money," or "net financial assets." So to set things straight, bonds are money, and bonds are "net financial assets."  Any disagreement?  Now for now I'll assume treasury bonds don't qualify as base money.  So when someone says the treasury "spends money into existence," they're correct, because bonds are money.  They've increased the net financial assets of the private sector, as well.  Now in any private sector transaction bonds and cash are two very distinguishable levels of money, as the bonds are worthless if not repayable... but, as I've mentioned a bunch of times but I don't think you've countered, the fact that the fed MUST ensure that the treasury remains solvent basically changes the whole meaning of these bonds.  It makes them almost equivalent to base money.  HB told us this.  This is a power that congress/treasury hold over the fed.  Further, the fed is NOT changing the money supply when it enacts QE.  It may be changing the "base money" supply, but that's just semantics as t-bills are almost identical to "base money."  MMT looks at the machine as a whole, not what accounting identities tell us things mean such as "account balances," "liabilities," and "base money" or "bonds." 

Further, you could look at the nature, simply, of the treasury's account at the fed, and come to the conclusion that there is a need to issue bonds and collect taxes.  There is.  Tax & "borrowed funds" are constantly pouring into this account as its emptied by spending.  As a part of the order of necessary operations, this is correct, but the traditional weight of these actions has NO bearing on the treasury's flexibility to spend, overall, as the fed & member banks are obligated to accomidate their spending.  As the treasury increases the amount of bonds in private sector, but the amount of reserves stays the same, the fed receives more tools with which to increase the reserve accounts of member banks, and forcing them to participate in treasury auctions.  If this is true, then for all intents and purposes at every level of government and the private sector, once money has been taxed, it's been destroyed.  It's given the gov't nothing, really, that it can't get through other mechanisms in its role as currency issuer.

Does it really help us to look at the fed & treasury as fully independent of each other when trying to visualize the nature of the monetary system?  No.  Does it help us to view base money as money but a 1-year T-bill as something fundamentally different?  No.  Does it help us to view the fed as an independent entity?  Absolutely not.  Some independence if they're basically beholden to the treasury. If our supposed "sole currency issuer" (the fed) is beholden to the treasury of the United States, it does us no good to try to put up big walls and pretend that it's not really "the Government" that is the currency issuer.  I'm actually surprised that we're not achieving more agreement on the fact that the fed, treasury, and member banks aren't in one very tightly organized circle jerk. (sorry for the imagery)

If you were to ask a smart financier back in 1970, "How can we design a sovereign fiat currency system for the United States using the current accounting & legal framework, with the fed & treasury as seperate legal entities?," this system is probably what they would have come up with. 

[MediumTex]

All of our money does not come from debt.  If all of the debt that is currently carried on the fed's balance sheet went away, there would still be gold.

Hoost, I think it is far more accurate to say "if all of that gold that is currently carried on the fed's balance sheet went away, there would still be debt."  After 1970 gold was irrelevant to the fiat money system.

That's an interesting way to think about it.  So what if all of the gold did go away?  What do you think would happen?  I'm trying to run through scenarios in my head and the only thing I can picture is economic collapse.

I still think in people's minds, as often evidenced by things you hear and read, they think the dollar is backed by gold.  I guess in reality, it is backed by gold, but not tied to it at a fixed exchange rate.

I think that you can look to the UK for a recent example of the exact scenario you are describing. 

I believe that in the late 1990s Gordon Brown thought it would be brilliant to sell all of the UK's gold, basically at the 30 year bottom for gold prices (around $250 per ounce).

The pound or the British economy didn't collapse.

[moda0306]

LW,

At this point, I think what you would tell me is that this is true but net financial assets have been created in the private sector while the liabilities are in the public sector.  However, we've established that there are only two possible ways for the Treasury to meet its $100 liability:

•Collect money in taxes from the private sector
•Borrow money from the private sector

What about its implied power over the fed?  If you had a rich uncle that everyone thought was one of the most powerful men in the world, but he was beholden to your spending and made sure that your bank account always had money in it, it seems to me a few things could be concluded by this:

- Your debts would likely be a lot more solvent than your account would lead a bank to believe... in fact your account is quite irrelevant to your solvency
- Any income you make is really quite irrelevent.  
- You really have an implied power over your uncle.  Your uncle isn't nearly as powerful if he's beholden to somebody else.

Now the analogy stops there because even you and your uncle are not currency issuers, but what I'm basically saying is that if your assertion is that the fed is our currency issuer, and fed is really beholden to the treasury, then you really need to re-look at the system and the natural conclusion one would come to is that the treasury & fed act in partnership as currency issuers, with some unfortunate orders of operation and accounting identities that carried over from the gold standard days when we were currency users, and both the fed and treasury were beholden to promises of conversion.  If the gov't, and not the fed alone, is the currency issuer, then it makes bonds a monetary tool, and taxes a tool to induce demand for currency and help prevent inflation as the government consumes and invests.

[Lone Wolf]

I know I might have been casual by saying the Treasury is "printing" but if I can clarify, the statement is really meant to refer to the printing of net financial assets (not exactly minting brand new electronic base money). I apologize if I was being too cavalier with the technicalities.
...
But, you are correct that the spreadsheet needs to balance, by law. And you are correct that the base money to buy the government's Treasuries had to be put into the hands of the private sector in advance.
...
In other words, if the balance sheet ever went negative (and something went terribly wrong) the Treasury and the Fed would literally need to recode their machines to stop the creation of base money into the private sector's bank accounts in a timely fashion. You are correct that the Treasury shouldn't really be creating base money, but that's likely how the computers are adding money into reserve accounts at the Fed.

Gumby, this is great!  It seems that we have converged on virtually all of the major points we've been going over.  More specifically, it seems like we agree on the following:

• The Treasury has an account at the Fed through which all spending and revenue flows.
• The balance of the Treasury's account must always stay positive and (thus far) always has.  Revenue precedes spending.
• The account going negative would be such an apocalyptic event that extreme Fed intervention of some kind would be very likely.  We do not want to find out what this looks like.
• The Treasury's account can only be replenished via taxation and borrowing, not direct printing.  Thus spending is always balanced or exceeded by total taxation and borrowing from the private sector.
• Rather than spend new money into existence a la the Fed, the Treasury creates new financial assets (bonds) that it sells to the private sector.  (More on where we differ here in a moment.)
• The great majority of our base money was created via Fed purchases of Treasury debt.  The Fed owns other securities such as morgage-backed securities (booo!), gold, and foreign currencies but these are minority players.  (We of course set aside coins, bills, etc.)

The problem for me is that I look at the above and very little of it seems to be modeled by MMT.  IMO.

So, anyway, when I pay my taxes, the money leaves the private sector. Yes, it's often spent again, but the main point is that only the Treasury has the ability to create or destroy net financial assets in the private sector.

Yes, it seems that the notion of the public sector vs. private sector is our last major area of disagreement.  I think that this is an extension of the fact that I treat the Treasury and Fed as separate entities while MMT treats them as a single unit.

I just don't think that the MMT model describes is the operational reality of the United States.  All modern industrialized nations (the United States included) have an independent Central Bank.  This is incompatible with the chartalist model that MMT describes.

I think we agree that when a Treasury bill is created, a financial asset enters the private sector and a financial liability attaches to the Treasury.  The question is whether this new liability matters to the private sector.  Given that the Treasury can pay this liability exclusively via taxation of or borrowing from the private sector and in no other manner, I just can't view this as a true "net financial asset".

[Gumby]

I'm traveling today, so I'll have to be brief.

It seems that we're all now universally on the same page that the Treasury doesn't literally "spend money into existence" but let me know if you disagree.

Not exactly. The Treasury ultimately creates a net deposit in the private sector — in the form of a Treasury security. The Treasury's liability is the private sector's asset.

LW, you often use the example of "Wolf Bonds," but Wolf Bonds aren't really accepted anywhere as a cash equivalent. In the private sector, Treasuries are as good as cash — which we know from the composition of our Permanent Portfolios.