2012 performance

[Gumby]

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).

If this is the case what do you make of the ~$847 billion in mortgage backed securities on the fed's balance sheet, as well as the ~$30 billion "toxic" debt that it holds in the Maiden Lane and TALF companies and the $28 billion in central bank liquidity swaps?

Fed balance sheet:  http://www.federalreserve.gov/releases/ ... nt/h41.htm

Right... the Fed swapped those assets out of the private sector and replaced them with base money. Much of it was an emergency monetary procedure. Though, even Bernanke has argued that the Fed may have been forced to overstep into fiscal policy. But, either way, those were swaps with the private sector. There's no helicopter drop in there. No new net financial assets entered the private sector.

Ultimately, we have to consider that if the Treasury needed to spend $50 quadrillion dollars by tomorrow — imagine we needed to build something incredibly expensive overnight — the Fed would be powerless to provide those additional net financial assets, via swaps, since there aren't $50 quadrillion in assets in the private sector. And for the Treasury to create $50 quadrillion in new Treasury securities — which is the only way to actually add net financial assets to the private sector — would require countless rounds of Treasury auctions and spending back into the private sector. It would be a very slow process for the Treasury to increase the net financial assets in the private sector that way...

...So, having the Treasury mint a large-denomination debt-free platinum coin is how the government could create $50 quadrillion dollars in a few hours if it needed to. It walks that coin over to the Fed and deposits it into its "account" and suddenly it has $50 quadrillion dollars in base money that it can spend at will. Now, you and I know that will probably never happen — since the government prefers to keep LW and the likes under the illusion of our "debt liabilities." But, it shows us who really has the power to actually create net financial assets in the private sector — it's not the Fed. The Fed cannot add $50 quadrillion dollars to the private sector by swapping assets. Only the Treasury can create new net financial assets in the private sector.

[Gumby]

Current points of agreement as of a page or two ago:

• 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.

No, we don't agree on that. The platinum coin law shows this is false. It also shows us that Congress could simply pass a law — just as President Lincoln did — to have the Treasury issue debt-free money if it wanted to. Lincoln's Greenbacks shows this is false.

"[Greenbacks] were originally issued directly into circulation by the U.S. Treasury to pay expenses incurred by the Union during the American Civil War"
Source: http://en.wikipedia.org/wiki/United_States_Note

LW thinks that the MMR $50 quadrillion coin idea is a banana republic, vomit-inducing abomination that would require the Fed to willingly surrender its independence.  MMR says LW is just being a weak-kneed sound money nancyboy who can't recognize an idea whose time has come.  :)

The Federal Reserve Act law we cited above shows us that the Fed has to yield to the Treasury Secretary's wishes in the event of a conflict of interests. It says so right in the law. The Fed isn't some rogue bank that can do whatever it wants to in a situation like that. It has to accept the coin. That's why the platinum law coin exists in the first place. It's an escape hatch for the government if it needs to end the debt charade. And Treasury-issued Greenbacks shows that the Treasury is where the real power to spend new net financial assets really comes from.

And furthermore, as MG pointed out, Congress already spends with the flick of a pen. And it could always pass a law that allowed the Treasury to spend in debt-free other ways if it really wanted to or needed to.

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.)

Yes, but the Fed couldn't do a helicopter drop if it wanted to. The Fed can only swap assets with the private sector.

[moda0306]

The $50 quadrillion dollar coin is unrealistic, but a $50 billion dollar one wouldn't be.  I think they should let the debt ceiling bs hit a near-cliff and then walk it over.  Show people how ludicrous this all is.  It is obvious the treasury, if not for the fed's dependence to it then because it can actually issue unlimited coinage, is co-currency-issuer.  I even posted a big link describing the relationship but of course that gets completely skipped over.

But I think LW is revealing his bias... "banana republic vomit-inducing" certainly implies that you WISH the fed to be independent, and the treasury to not truly have unlimited spending capabilities... like a bunch of unelected bankers are more trustworthy than elected officials.  LW sees accounting identities and procedures that are essentially overridden by the fed & member banks actions (as I previously posted a description of), and especially overridden by the fact that the treasury, by law, can issue debt-free money any time it wants.  This may feel like cheating, but what about having the sole money-issuer be an entity that is neither held accountable to the public democratically, nor to markets capitalistically.  I don't see this as much better.  I'd rather simply be able to have access to foreign (or precious metal) currency markets if that's how I want to save, and have the government be a currency issuer.  However, the fact that I'd LIKE it to be this way has no affect on whether I see it to effectively be this type of system.

Further, I haven't listened to him in a while, but I doubt HB's position was "if push comes to shove the fed would break the law and directly fund the treasury," though I could be wrong... I'd find it odd that a guy would have said this, but then said "stay away from FDIC insured accounts because we're not sure whether congress will back the FDIC."

Since I know a lot more angry voters with FDIC insured accounts than treasury bonds, I highly doubt HB would have looked at them both as being cash-like only with an unprecedented bail out, but assume without question that the treasurybail out would be multitudes more likely than FDIC bailout.

[MediumTex]

Lone Wolf,

Are you a "sound money nancyboy"?

[moda0306]

A slightly Wonkish analysis from Marriner Eccles:

If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed. Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war… So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true…

Money is created by debt—either private or public debt—and to the extent that the banking system creates deposits through the purchase of Government securities or through the lending of money, either way, it is a process of monetization. You monetize private debt, but there can be no objection to that so long as the debt that is created is increasing production and employment. There may be such a thing as private debt that is purely speculative, such as the stock market, or real estate or other operations which are creating no employment and creating no production. It certainly is not a very desirable situation to have money created through that form of debt.”?

[Gumby]

Nice quote Moda. (For those not familiar with Marriner Eccles, he was the Chairman of the Fed during the 1930s and 40s.)

I also think we shouldn't overlook Lincoln's Greenbacks, issued by the Treasury during the Civil War, which also proves that only the Treasury can add net financial assets to the private sector. The Fed doesn't add net financial assets to the private sector. The Fed is basically a giant money-changing machine — a very powerful one albeit.

[moda0306]

And I'm sorry, but the Banana Republic sounds like a very delightful place to live... I don't know why there's so much negative attached to that term.  It sounds like a place where I live in a beach hut, drink margaritas, and drive my dune buggy to a diving cliff.

And some of the most unexpected non-hangovers have occured the morning after vomit-inducing took place.  This might happen a lot in my beach hut in the Banana Republic.

[MachineGhost]

Yes, but the Fed couldn't do a helicopter drop if it wanted to. The Fed can only swap assets with the private sector.

I'm not so sure.  Wikkipedia seems to implie the Fed can authorize unlimited amounts of Federal Reserve Notes to be printed up by the Bureau of Engraving and Printing. 

I've seen no stipulation that base money has to be swapped for these notes.

MG

[MachineGhost]

I also think we shouldn't overlook Lincoln's Greenbacks, issued by the Treasury during the Civil War, which also proves that only the Treasury can add net financial assets to the private sector. The Fed doesn't add net financial assets to the private sector. The Fed is basically a giant money-changing machine — a very powerful one albeit.

I think it would be more accurate to say that only the government can allow "net financial assets" to grow in the private sector as long as legal tender laws exist.  Because, the just distribution of those assets is very questionable.

There are now 1,226 billionaires on the Forbes billionaires list. They come from 58 different countries. 

There are 95 billionaires in China, 48 in India, 96 from Russia, and 36 from Brazil. The Boston Consulting Group reported in May 2011 that total global wealth owned by rich people hit a new record of $121.8 trillion. And the number of the world’s millionaires hit a new record as well—12.5 million, an increase of 12.2%.

The Boston Consulting Group also reported that 0.9% of the richest households in the world control 39% of the world’s wealth.

[hoost]

How does MMR/MMT address fractional reserve banking?

[hoost]

Good idea, hoost!  It is probably helpful to post an "inventory" of what we've agreed on and where we still disagree.  As suggested by Medium Tex, I posted one of these a while back.

Current points of agreement as of a page or two ago:

• 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.)

I think we've distilled things down to where we don't line up (some text gratefully stolen from MG).

• LW thinks the Fed is independent and has the power to create the money supply that we all use.  MMR says that the Fed is just an accounting gimmick and that Congress determines the money supply via authorized spending.
• LW thinks that because MMR models so little of the first list that it obfuscates and waves its hands about the real workings of our US system.  MMR says that it is correctly modeling the net effects of our system and that much of the first list is just gold standard cruft.
• LW thinks that the MMR $50 quadrillion coin idea is a banana republic, vomit-inducing abomination that would require the Fed to willingly surrender its independence.  MMR says LW is just being a weak-kneed sound money nancyboy who can't recognize an idea whose time has come. 

I'm comfortable "agreeing to disagree" on the above points.

Thanks for the summary LW.

Some questions:

• How is base money defined? (I think I just asked the same question on another thread)  Is this the total liabilities of the fed?
• How do we define money supply?
• What do you think would actually happen if the treasury printed a $50 quadrillion coin and deposited it at the fed?
• There's a lot of talk of "net financial assets"; what does this mean?
• What is a helicopter drop?

[Lone Wolf]

Current points of agreement as of a page or two ago:

• 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.

No, we don't agree on that. The platinum coin law shows this is false. It also shows us that Congress could simply pass a law — just as President Lincoln did — to have the Treasury issue debt-free money if it wanted to. Lincoln's Greenbacks shows this is false.

Lincoln's Greenbacks were issued 100 years before our fiat currency was established.  This was nearly a half century before we even had a Federal Reserve.  Still, if this is a concern for you, I'll definitely add a parenthetical about it.

The Federal Reserve Act law we cited above shows us that the Fed has to yield to the Treasury Secretary's wishes in the event of a conflict of interests. It says so right in the law.... It has to accept the coin.

I think that your interpretation of the law is extremely overeager on the issue of this "platinum coin" thing.  To me, it simply says that the Fed can't encroach upon the Treasury's powers, not that the Treasury can force the Fed to do absolutely anything.  If we disagree there, we can add that to the list.

Are you a "sound money nancyboy"?

I prefer the private issuance of currency but as of today this is pure fantasy.  I think that the gold standard was for the most part a good system, comparatively speaking.  It had, however, two major practical problems, one of which doomed it to failure IMO:

• It constrains government.  This is a good thing.  However, governments will inevitably tire of these constraints on their "flexibility" to make war and spend resources.  This will lead them to break the promise of a gold standard.
• It causes government to take too much of an interest in gold.  This motivates them to place restrictions on gold ownership in times of "crisis".  Under a fiat system, governments appear to care less about who is or isn't owning, hoarding, or speculating in gold.  This leaves governments less motivated to intrude on the important freedom to own hard assets.

[Lone Wolf]

An updated list of our points of agreement.

• 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.  (Setting aside the "Greenbacks" from the 1860s or the theoretical "platinum coin trick".)
• 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.)

Where we don't line up (some text gratefully stolen from various individuals).

• LW thinks the Fed is independent and has the power to create the money supply that we all use.  MMR says that the Fed is just an accounting gimmick and that Congress determines the money supply via authorized spending.
• LW thinks that because MMR models so little of the first list that it obfuscates and waves its hands about the real workings of our US system.  MMR says that it is correctly modeling the net effects of our system and that much of the first list is just gold standard cruft.
• LW thinks that the MMR $50 quadrillion coin idea is a banana republic, vomit-inducing abomination that would require the Fed to willingly surrender its independence.  MMR says LW is just being a weak-kneed sound money nancyboy who can't recognize an idea whose time has come. 
• LW thinks that creating "net financial assets in the private sector" isn't very meaningful as the corresponding public liabilities will be serviced via taxation or borrowing.  MMR says that public liabilities are better because the Treasury has access to the Fed's money creation through bond issuance and subsequent purchase by the fed.
• LW does not believe that the Federal Reserve Act requires the Fed to buy any asset that the Treasury says it must buy.  MMR says that the Fed is required to buy any asset that the Treasury says it should.

[moda0306]

I would say that we probably still don't agree on the following:

•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.)

If the Treasury and the fed are closely tied the ways we've described so many times, then really the government as a whole is a currency issuer, not just the fed, which makes their bonds the basic equivalent of a savings account, which makes those statements false.

Also,

•The Treasury's account can only be replenished via taxation and borrowing.

Is it really "borrowing" if the entire process is one big pre-organized event (as we've shown it to be) where the fed, for all intents and purposes, controls the price that banks will borrow at?  We can call it that, and the name still probably qualifies, but there's a lot of weight to your terms that doesn't apply to the treasury/fed/member banks dancing in pre-designed unison.  Once again, you're looking at semantics and accounting identities instead of realities.

Treasury being able to issue coinage makes it directly, not indirectly, a currency issuer.  The fact that they might use this priviledge may scare you, but I don't see how a central bank isy less scary as sole currency issuer.  The fed wouldn't surrender anything, because it's not really independent.  If they were, why do they return all of their interest to the treasury?  Why do they coordinate with the treasury on everything?  Why do people view bonds as risk-free?  The treasury doesn't have to "tell them" to do anything... they coordingate.

MMR waves its hands over nothing.  If you'd take the time to read some of their work, you'd realize they have an intimate understanding of the monetary system... moreso that any current Austrian I know of is even close to understanding.

[Gumby]

I dunno LW.. You tell us that the Treasury is borrowing the Fed's money (we agree that happens operationally). But, then you don't seem to acknowledge that the Fed's money would not exist without the bonds that the Treasury issued. So, in fact, the Treasury is actually borrowing a liquified version of its own Treasury bonds.

Don't you see that the new bonds that the Treasury issues are really the foundation of our money supply? Our money supply (under normal operations) is literally swapped out bonds. Can you respond to this point? Because, if not, it seems like you are just ignoring an extremely key point in this conversation.

All the Fed does is liquify (Treasury) assets into a legal tender format. But the Fed would not be able to do that without Treasuries existing in the first place.

[hoost]

Assumptions:

The Treasury's spending account is held on the Federal Reserve's Balance Sheet as a liability.

Treasury Bonds are not money; the Treasury doesn't pay people in bonds. It sells bonds to get Federal Reserve Notes and pays people with these.  Likewise, you can't pay your taxes with a Treasury Bond; it must be exchanged first for Federal Reserve Notes.  When a bank purchases a bond from the treasury, its Federal Reserve Notes held at the Fed are transferred to the gov'ts account.  This is a liability-side transaction.  The same goes for taxes.  It does not change the amount of Federal Reserve Notes in existence.  This only occurs when the Treasury (or private group) repays the principle on a bond to the Fed (or if the fed sells assets).

Bonds are debt.

Only the Fed can issue Federal Reserve Notes.  The Bureau of Engraving and Printing, part of the Treasury, prints them for the Fed, then sends them to the Fed.  The Fed is the only one who actually puts them into circulation; it does so via banks.

The Fed's current balance sheet consists of about 60% Treasury securities; about 40% is private and/or foreign debt. Federal Reserve Notes are issued against these securities.  (http://www.federalreserve.gov/releases/ ... nt/h41.htm)

The private and foreign debt was "purchased" by the Fed during the financial crisis.  Some of these positions are being slowly unwound.

The audited total public debt outstanding at fiscal year end 2011 (Sept. 30, 2011) was $10.127 trillion, $1.665 trillion of which was held by the Federal Reserve. (http://www.treasurydirect.gov/govt/repo ... nn2011.pdf, pp.24-25)

The Fed attempts to drive down interest rates by buying govt securites; this increases perceived demand for the securities, thereby increasing the price of the securities and lowering the yield.  This is how the Fed attempts to achieve the Federal Funds rate.

The Federal Funds rate is not the same as the discount rate; the discount rate is the interest rate at which the Fed lends money to banks overnight.

Repayment of Federal Reserve-held debt by the Treasury extinguishes base money; interest payments due to the Fed are returned to the Treasury (less expenses).

Banks hold Federal Reserve Notes on deposit with the Fed as reserves.

Banks leverage Federal Reserve Notes to issue bank credit.  This means that if a bank has $100,000 in demand deposits outstanding, it must hold $10,000 in federal reserve notes with the Fed.

Excess reserves are Federal Reserve Notes deposited by banks with the Fed in excess of what is required in order to meet their reserve requirement (currently 10%).  If a bank had $100,000 in demand deposits outstanding, and $20,000 in Federal Reserve Notes on deposit at the fed, $10,000 of the $20,000 would be considered "excess reserves".

The United States Mint mints coins for the Treasury dept.  Theoretically the Treasury could mint whatever type of coin it wants and arbitrarily set its value (think penny, nickel, dime, quarter, gold eagle ($50??!), etc.).  The Fed holds some coins as assets.

The money supply consists of Federal Reserve Notes in circulation and demand deposits (checking accounts, possibly also savings accounts if they are unrestricted); every other financial instrument must be exchanged for one of these two things in order to complete most transactions (aside from some sort of trade).

The Treasury and the Fed are closely tied together.  They talk daily; the Fed accomodates the Treasury's spending.  These two institutions need each other in order to pull of the manipulation they do.

Conclusions

There are multiple ways to increase the money supply.

1. The fed exchanges Federal Reserve Notes for government debt.
2. The fed exchanges Federal Reserve Notes for private debt.
3. Banks expand demand deposits by issuing loans.


Observations (holding all other variables constant):


Issuance of Treasury debt is DEFLATIONARY. 
-Banks transfer reserves to the govt, lowering the amount of available reserves to back loans.

Treasury spending is INFLATIONARY.
-The govt transfers reserves to banks, increasing the amount of reserves available to back loans.

Fed purchasing of securities on the open market is INFLATIONARY (decreasing the Federal Funds target).
-The Fed gives banks reserves in exchange for bonds.  Banks can then put the currency in circulation or leverage it.

A reduction of reserve requirements is INFLATIONARY.
-This allows banks to loan more money.

Paying interest on reserves is DEFLATIONARY.
-This encourages banks to keep money out of circulation.

Increasing the discount rate is DEFLATIONARY.
-This makes it more costly for banks to over-reach.

Retirement of Federal Reserve-held securities is DEFLATIONARY.
-This reduces the number of Federal Reserve Notes available.

----

I've tried to stick with objective observations here, and then draw some logical conclusions based on those observations.  If we can't agree on HOW the system works, we can't really debate whether or not it's a good system and the implications of various policies.  Bear in mind that all of this stuff happens at once; we need to look at the aggregate to actually determine what's happening.  This thing has a lot of moving parts (by design), so unless we know what each part does, we can't see how they work together.

[Gumby]

Treasury Bonds are not money; the Treasury doesn't pay people in bonds.

Issuance of Treasury debt is DEFLATIONARY.  
-Banks transfer reserves to the govt, lowering the amount of available reserves to back loans.

The Treasury's liabilities are the private sector's assets. Therefore, the issuance of Treasury bonds are most certainly an inflationary pressure. Treasuries are a cash equivalent for the private sector. I can have a Treasury Money Market Fund and write checks from it. Treasuries are the private sector's savings. Having all our cash as Treasuries in our Permanent Portfolios proves this.

Fed purchasing of securities on the open market is INFLATIONARY (decreasing the Federal Funds target).
-The Fed gives banks reserves in exchange for bonds.  Banks can then put the currency in circulation or leverage it.

Nope. What you are describing is an asset swap. The private sector is no richer or poorer after that transaction. This is why $600 billion of QE does not create inflation — all it does is change the liquidity of the private sector.

Hoost, the Fed does not have the authority to increase net financial assets in the private sector. It can't happen. Only the Treasury can increase net financial assets in the private sector, through a net deposit of Treasury securities into the private sector. The Treasury's liabilities are the private sector's assets. The Treasury essentially "borrows" a liquified version of its own Treasury bonds.

"But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place" — Richard W. Fisher, Dallas Federal Reserve Bank
Source: http://www.dallasfed.org/news/speeches/ ... 110208.cfm

Think about it. It's a real brain teaser.

[HB Reader]

Current points of agreement as of a page or two ago:

• 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.

No, we don't agree on that. The platinum coin law shows this is false. It also shows us that Congress could simply pass a law — just as President Lincoln did — to have the Treasury issue debt-free money if it wanted to. Lincoln's Greenbacks shows this is false.

Lincoln's Greenbacks were issued 100 years before our fiat currency was established.  This was nearly a half century before we even had a Federal Reserve.  Still, if this is a concern for you, I'll definitely add a parenthetical about it.

The Federal Reserve Act law we cited above shows us that the Fed has to yield to the Treasury Secretary's wishes in the event of a conflict of interests. It says so right in the law.... It has to accept the coin.

I think that your interpretation of the law is extremely overeager on the issue of this "platinum coin" thing.  To me, it simply says that the Fed can't encroach upon the Treasury's powers, not that the Treasury can force the Fed to do absolutely anything.  If we disagree there, we can add that to the list.

I absolutely agree with LW about the overly broad interpetation of the Treasury Secretary's powers under the Federal Reserve Act.  I also think there would be a high likelihood of some Treasury officials being put in jail for contempt of Congress if they tried to use the "platinum coin" idea to fund government operations.  I strongly suspect that is also the view of the lawyers in the Treasury, Federal Reserve and on the Congressional oversight committees.  I can't imagine that being viewed in Congress as anything other than a clumsy attempt by the Executive branch to usurp Congressional control over the government's pursestrings.  I think we had a thread about some of these issues last summer.

Also, I think the fiat greenbacks issued under President Lincoln were issued under authority of the Legal Tender Acts as passed in Congress.  I don't think Lincoln did it totally on his own.  I could be wrong about that.  Certainly Congress can pass nearly any law they want, but I'm not sure that proves much one way or another.    

I'm not trying to attack MMT here (as I think it has some analytical value), but I seriously doubt that some of the statements I'm seeing cast about are anywhere near as "settled" as some adherents are asserting.    

[Gumby]

I also think there would be a high likelihood of some Treasury officials being put in jail for contempt of Congress if they tried to use the "platinum coin" idea to fund government operations.

What gives you that idea? The law — written by Congress — says that the Treasury secretary has the power to mint a platinum coin of any denomination he chooses.

http://www.law.cornell.edu/uscode/text/31/5112#k

In fact, all coins that the Treasury secretary orders to be minted are debt-free legal tender. Are you suggesting that the Treasury Secretary should be thrown in jail for minting $500 million in quarters, which are debt-free legal tender? That doesn't make any sense.

The Treasury Secretary is perfectly in his right to mint a $50 billion coin or $50 trillion coin and deposit it in the Treasury's Fed account. Once the coin is struck it becomes legal tender. Legal tender laws require banks to accept it (that's the whole point of legal tender laws). The Fed doesn't get to reject legal tender because they don't like it. Like it or not, coins are debt-free legal tender instruments.

Congress went through a lot of trouble to write the platinum coin law the way they did. It wasn't an accident. It was purposefully put in there as an escape hatch and worded in a way that there was no restriction put on the Secretary of the Treasury. You don't have to like it, but it's law.

I strongly suspect that is also the view of the lawyers in the Treasury, Federal Reserve and on the Congressional oversight committees.  I can't imagine that being viewed in Congress as anything other than a clumsy attempt by the Executive branch to usurp Congressional control over the government's pursestrings.

You are mistaken. The law that gives the unlimited power to the Secretary of the Treasury was written by Congress.

http://www.law.cornell.edu/uscode/text/31/5112

This is not some Treasury Official's attempt to create a loophole. The law was written by Congress. It's obvious that Congress wanted an escape hatch in case they ever needed to order the Treasury Secretary to use it. I agree that this is something that will likely never be used, but please don't try to make this look like someone in the Executive branch is trying to pull a fast one on Congress. Congress wrote the platinum seignorage law and passed it!

Anyway, the Federal Register says...

“Pursuant to the United States Mint Public Enterprise Fund (PEF) statute, 31 U.S.C. 5136, all receipts from fines assessed under the regulation would be deposited in the PEF and the Secretary of the Treasury would transfer these amounts, along with regular United States Mint seigniorage and profits, to the General Fund as miscellaneous receipts. As miscellaneous receipts in the Treasury—the drawing of funds from which are subject to appropriation by Congress—neither the Secretary of the Treasury, nor the Director of the Mint could be subject to “possible temptation * * * when [their] executive responsibilities * * * may make [them] partisan to maintain the high level of contribution”? from the assessment process provided for under the regulation. Cf. Ward v. Village of Monroeville, 409 U.S. 57, 60 (1972). Moreover, the amounts involved would nonetheless render any ostensible temptation inconsequential because the relatively small amounts that the United States Mint could be expected to receive in fines payable under 31 U.S.C. 333 would be de minimis when compared to the recent amounts ($600-800 million) that the United States Mint annually has transferred to the General Fund.“
Source: https://www.federalregister.gov/article ... tates#p-46

What that means is that the Mint stated in the Federal Register that 31 USC 5136 allows the Secretary to deposit Mint seigniorage  “as miscellaneous receipts in the Treasury, the drawing of funds from which are subject to appropriation by Congress”?. It would be counted on the federal budget as revenue similar to Federal Reserve seigniorage, which is deposited as miscellaneous receipts in the Treasury, the drawing of funds from which are subject to appropriation by Congress.

In other words, the Fed doesn't get to choose what is money and what is not.

But, let's be honest. The Treasury will never resort to seignorage to pay off the national debt — even though it's clear that they could. If they did, the entire debt charade would be over.

Also, I think the fiat greenbacks issued under President Lincoln were issued under authority of the Legal Tender Acts as passed in Congress.  I don't think Lincoln did it totally on his own.  I could be wrong about that.  Certainly Congress can pass nearly any law they want, but I'm not sure that proves much one way or another.

Lincoln pressured Congress to let the Treasury issue fiat money. What it proves is that the Treasury is the institution that creates net financial assets in the private sector. The Fed does not have the authority to conduct helicopter drops or increase net financial assets in the private sector.

[hoost]

Treasury Bonds are not money; the Treasury doesn't pay people in bonds.

Issuance of Treasury debt is DEFLATIONARY.  
-Banks transfer reserves to the govt, lowering the amount of available reserves to back loans.

The Treasury's liabilities are the private sector's assets. Therefore, the issuance of Treasury bonds are most certainly an inflationary pressure. Treasuries are a cash equivalent for the private sector. I can have a Treasury Money Market Fund and write checks from it. Treasuries are the private sector's savings. Having all our cash as Treasuries in our Permanent Portfolios proves this.

Fed purchasing of securities on the open market is INFLATIONARY (decreasing the Federal Funds target).
-The Fed gives banks reserves in exchange for bonds.  Banks can then put the currency in circulation or leverage it.

Nope. What you are describing is an asset swap. The private sector is no richer or poorer after that transaction. This is why $600 billion of QE does not create inflation — all it does is change the liquidity of the private sector.

Hoost, the Fed does not have the authority to increase net financial assets in the private sector. It can't happen. Only the Treasury can increase net financial assets in the private sector, through a net deposit of Treasury securities into the private sector. The Treasury's liabilities are the private sector's assets. The Treasury essentially "borrows" a liquified version of its own Treasury bonds.

"But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place" — Richard W. Fisher, Dallas Federal Reserve Bank
Source: http://www.dallasfed.org/news/speeches/ ... 110208.cfm

Think about it. It's a real brain teaser.

It appears that you are contesting my definition of the money supply, so please provide an alternate definition.

No one has yet provided a definition for "net financial assets".  I don't see any value in the concept, so I won't be writing my own.

I agree that you can write checks from a money market fund.  However, in order to execute the transaction, the money market fund must sell an asset (whether it's treasury debt, junk bonds, or corporate debt) and get cash (federal reserve notes or bank credit) to complete the transaction for you.  It is transparent to you and me, and happens instantly because most money markets keep cash on hand to facilitate these transactions.  At the end of the day, someone has to sell one (or more) of those assets to replenish the cash holdings of the fund.

Treasury bonds are not legal tender.  Take one of your t-bills to the local gas station this weekend and try to purchase a twinkie (sp?); as a matter of fact, take it all over town and try to buy things with it.

We hold treasury bills and bonds in the PP because they're very liquid (meaning you can exchange them easily for cash) and the government will never default on them.  The reason the government will never default on them is that the Fed will always buy treasury debt on the open market, driving down interest rates and allowing the treasury to borrow more money.

It is not the issuance of treasury bonds that is inflationary but the purchase of those treasury bonds by the fed.  Inflation is an increase in the money supply.  The money supply consists of federal reserve notes and bank credit.  When the treasury issues a bond, it reduces the amount of bank credit available (because banks exchange reserves for the bond).  When the fed buys the bond from the bank, it increases the number of federal reserve notes and also allows for an increase in bank credit, which increases the money supply.



I apologize if I'm very direct.  I'm an engineer with a Type A personality, so I usually just cut to the chase.  I don't consider any of this discourse to be personal, and I hope no one else is taking anything personal.  I think debate and discussion are excellent ways to learn and explore new ideas, and I'm thoroughly enjoying our conversation.

hoost

[Gumby]

It's not just about the money supply. What I'm saying is that Treasury bonds are assets that are created by the Treasury and they add to the private sector's wealth. The Fed doesn't create new assets — it just swaps and modifies them (i.e. by turning bonds or other assets into base money).

But, what's important to realize is that the money supply would not exist without the assets that the Treasury creates. That's why they call it "debt-based money".

[MachineGhost]

The Treasury Secretary is perfectly in his right to mint a $50 billion coin or $50 trillion coin and deposit it in the Treasury's Fed account. Once the coin is struck it becomes legal tender. Legal tender laws require banks to accept it (that's the whole point of legal tender laws). The Fed doesn't get to reject legal tender because they don't like it. Like it or not, coins are debt-free legal tender instruments.

That's an interesting perspective I never thought of before.  So, what are the practical implications that our coins are debt-free whereas our currency is not?

MG

[Gumby]

The Treasury Secretary is perfectly in his right to mint a $50 billion coin or $50 trillion coin and deposit it in the Treasury's Fed account. Once the coin is struck it becomes legal tender. Legal tender laws require banks to accept it (that's the whole point of legal tender laws). The Fed doesn't get to reject legal tender because they don't like it. Like it or not, coins are debt-free legal tender instruments.

That's an interesting perspective I never thought of before.  So, what are the practical implications that our coins are debt-free whereas our currency is not?

MG

Well, this means that the Treasury can provide reserves to the Fed through coin seigniorage rather than bond auctions. For instance, Dollar coins cost only cost 12 cents to mint and the US Mint "sells" them to the public (you can even buy coins directly from the US Mint). The sale, minus the cost of minting the coins, is essentially the US Mint’s profit. The US Mint’s profits can be moved into the Treasury General Account under Miscellaneous Receipts. These miscellaneous receipts at the Treasury effectively raise the Treasury's revenue, and their statutory categorization as Misc. Receipts means they can be used as general funds.

But, it's important to understand that the US Mint makes a profit every time it mints a coin. They mint a coin and it is real currency. Then the private sector pays the US Mint for the coin. The money you pay for the coin can go into the Treasury's General Account under Misc. Receipts and can be spent into the private sector as general funds. So, the Treasury is creating debt-free currency every time they strike a coin. The only "debt" incurred is really just the cost of a coin (about 12¢ for a dollar coin, for instance). This process is nothing new.

In fact, the Treasury deposits seignorage profit into the General Fund all the time...

"Seigniorage is deposited periodically to the General Fund where it reduces the government’s need to borrow."

Source: United States Mint FY 2013 President’s Budget Submission (Page 4): http://www.treasury.gov/about/budget-pe ... t%20CJ.pdf

And for more information, see: http://en.wikipedia.org/wiki/Seigniorage

[hoost]

It's not just about the money supply. What I'm saying is that Treasury bonds are assets that are created by the Treasury and they add to the private sector's wealth. The Fed doesn't create assets — it just modifies them (i.e. by turning bonds or other assets into base money).

But, what's important to realize is that the money supply would not exist without the assets that the Treasury creates. That's why they call it "debt-based money".

I believe I offered the definition of inflation as an increase in the money supply.  If I did not, I apologize for the confusion.  Therefore when you say that something is inflationary or deflationary, we need to look at what happens to the money supply with a given input to determine whether or not this is the case. 

If you wanted to look at it in terms of assets and liabilities, that may also be instructive, but it's also important to look at the transactions associated with these assets and liabilities.  This is why the mechanics are important.

Let's imagine there is only one federal reserve note in existence; we won't go into where it came from, it's just there.

The government creates a bond.  The act of creating this bond creates both an asset and a liability on the government's balance sheet. 

AssetsLiabilities
BondBond

This does indeed create a new asset, but it also creates a new liability.

The bank holds the federal reserve note as an asset on its balance sheet; it has no liablities, (the balance is equity; someone invested the federal reserve note in the bank).

AssetsLiabilities
Federal Reserve Note0

The government then sells the bond to a bank for one federal reserve note.  It exchanges an asset for an asset.

Govt:
AssetsLiabilities
Federal Reserve NoteBond

Bank:
AssetsLiabilities
Bond0

Now the Federal Reserve comes in and decides to buy the govt bond from the bank.

Federal Reserve:
AssetsLiabilities
BondFederal Reserve Note

Govt:
AssetsLiabilities
Federal Reserve NoteBond

Bank:
AssetsLiabilities
Federal Reserve Note0

Now there are two Federal Reserve Notes in existence.

Govt bonds are both an asset and a liability when they are created.

Federal reserve notes are only a liability when they are created.


The real question is: where does the first federal reserve note come from?

[Gumby]

I believe I offered the definition of inflation as an increase in the money supply.  If I did not, I apologize for the confusion.  Therefore when you say that something is inflationary or deflationary, we need to look at what happens to the money supply with a given input to determine whether or not this is the case.

No. You just invented a definition of inflation. That's not what inflation is. The real definition of inflation is...

"In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time"
Source: http://en.wikipedia.org/wiki/Inflation

You can't just assume that inflation is a pure function of the money supply. It doesn't work that way. There are many, many factors that cause inflation or deflation.

Federal reserve notes are only a liability when they are created.

The real question is: where does the first federal reserve note come from?

It's not a difficult question. Every Fed liability has a corresponding asset. Federal Reserve Notes are generally backed by Treasuries. Federal Reserve Notes would not exist without the debt. That's why we say that our money supply is "debt-based".

The Treasury's liabilities are the private sector's assets. The Fed just converts those assets into our money supply.