2012 performance

[moda0306]

hoost,

To understand what a "net financial asset" is we have to take a step back a bit.  "Financial Assets" (IOUs, bonds, stocks) are different from non-financial assets (a home, an operating business, a patent, a car), in that they're offset by a financial liability of another that nets to zero.  In fact, the fact that they net to zero tells us something about them.... they're not really "assets" in and of themselves... simply a facilitator to wealth creation. If I were to loan you $1,000, you'd have $1,000 in liability to me, and I'd have $1,000 in an asset from you.  All "horizontal money" comes as a result of this... loans from banks are financial assets that net to zero with a financial liability.  The hope is, that through these contracts, we can live up to our full potential as mindless consumers...AAHHH... I mean engaged, productive, entrepreneurs & citizens  :D.

Think of the 1800's, where much of the "money" was simply IOUs.  Those IOUs were financial assets backed by liabilities to perform some duty in the future.

When you have a government that issues a fiat currency, people can hold assets without a corresponding financial liability existing in any real sense (I've argued, however, that there IS a liability there by the government, and that is to sustain a productive and free society to give the currency value... but that's a bit deeper into it, and very different from a constraint of a financial liability).  So in this case, people can hold assets without there being a corresponding liability.  Having these assets in the economy, it's argued, can help grease the system of other financial assets from locking up.

The problem is, when we run large trade deficits as the world currency issuer, we lose those NFA's, and we hadn't been running large enough fiscal deficits from 1997-2008 to make up for that loss... so when we hit 2008 with no savings, our economy locked up much more so than it would have done if people would have had more $$'s on their balance sheets.

I'd also say that I think any assets/liabilities between the treasury & the fed are there in accounting identity only... this is where MMR doesn't "gloss over" these relationships so much as sees them for what they really are.  

An example of financial assets being used as money would be when an entrepreneur sells his startup company to Google or something, Google will often pay him in Google stock for the stock of his company.

I'm not saying we'll see grocery stores accepting stocks/bonds any time soon, but one thing that's important to point out is that MMR, Gumby and myself tend to think that the "moneyness" of assets on your financial balance sheet is much less important than the makeup of the balance sheet itself.  By "Important" I mean in terms of whether we'll decide to spend or how we decide to invest, or whether we want to invest in another currency.  Our technology is getting to a point where we very well could probably start paying for stuff with electronic-based financial assets that aren't dollars... it'd be clumbsy and unnecessary, but possible... but it's less important that they can act as money, and more important how the asset side of our balance sheets interact with the liability side, and how our expected future cash flows will service those liabilities.  This is why MMR concentrates on "NFAs" so much... because the lack of a corresponding TRUE financial liability adds certain stabilizing aspects to our balance sheets in the private sector.

[Gumby]

No base money is created or destroyed.

When we say "base money is destroyed" or "created" we are talking about the private sector's point of view. In other words, "base money is removed from the private sector" or "base money enters the private sector". My apologies if that wasn't clear to you. It's like the stadium scoreboard. You can say that the points aren't created or destroyed during a game, but it makes no difference if the stadium has a room full of electronic points or not, because the stadium isn't going to run out of points. Likewise, the government isn't going to run out of money.

Bank has no money to pay back loan to Fed.

Sure it does. The Treasury spends money from the bond sale and the money soon becomes excess reserves in the banking system. The Primary Dealers and Fed coordinate to target those reserves with the Treasury.

This assumes no interest was paid on the loan.

Ah, but interest is the key here. The private sector would eventually come up short on its interest payments if the Treasury were not constantly creating a fresh supply of net Treasury deposits in the private sector.

The Treasury is both a currency user and a currency issuer.  However it doesn't issue Federal Reserve credit; it can only issue coins.

Not true. The Treasury issues Treasuries — which represent the private sector's risk-free assets and savings. We know this from our own experiences because our Permanent Portfolios are mostly comprised of Treasury securities — they are our largest asset.

The bankers and central banks, who make up the majority of the market for Treasuries, understand that the Fed will always buy Treasury bonds if necessary and there is no default risk.

Not exactly. Primary Dealers are contractually obligated to take part in Treasury auctions and the secondary market. In fact, Primary Dealers want to do this because it lets them unload their excess reserves into risk-free assets (which they can leverage).

In this scenario, MBS are base money.

No, MBS are not base money. Not sure how you've come to that conclusion. You can't buy a Treasury Bond at auction with MBS. You can't pay taxes with MBS. MBS are not legal tender and cannot be base money. MBS are private credit instruments. In order to fulfill the interest and principal payments, it requires real base money dollars. MBS can be swapped for base money. Is that what you meant?

The Fed can never take a loss.

Not exactly. The Fed had a $2.7 billion (paper) loss on Bear Stearns:

The Federal Reserve on Thursday said it had suffered a $2.7bn paper loss on the $29bn portfolio of toxic assets it took over from Bear Stearns in March as part of JPMorgan Chase’s government-brokered takeover of the stricken investment bank.
Source: http://www.ft.com/intl/cms/s/0/bc104618 ... z1uwj3PVGP

But, I understand what you are trying to say. The Fed doesn't have to acknowledge a loss, since it doesn't carry assets at their market value on its books. Anyway, it really doesn't matter because the Fed is the most profitable bank in the world — thanks income from Treasuries. All of its profits are returned to the Treasury.

The Fed doesn't hold Treasuries because they are risk free.  Treasuries are risk free because the Fed holds them.

Treasuries aren't backed by the Fed. Treasuries are obligations of the US Treasury. As I mentioned the Dallas Fed quote from a few pages ago, the Fed would not even be able to monetize the debt if the debt did not exist in the first place.

"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

Treasury's bonds also existed before the Fed existed and have always had virtually no credit risk to them. The Fed doesn't need to exist for Treasuries to be risk free. The Fed is certainly crucial within the current framework, but the Fed is not a crucial entity that needs to exist for our Treasuries to be risk free. We could simply "end the Fed" and write a new law to retire the debt. Our government would simply give money creation powers to the Treasury if the Fed was dissolved. And over the long run, the Fed cannot create enough base money for the private sector without Treasuries — otherwise the private sector would be handing all of its private credit assets over to the Fed for every base dollar to exist and then eventually run out of assets paying off the principal and interest on those assets.

The Fed holding MBS creates base money.

If all of the credit and debt in the entire economy (public and private) were paid off, you would be left with gold and treasury coins backing the remaining Fed currency.

Yes, though I'll also point out that fiat Greenbacks, seignorage, as well as gold and silver, have all contributed to the base money supply since the founding of our country.

But the private sector would eventually be unable to pay the interest to the Fed on those MBS after the principal was paid down without handing over some of the remaining asset-backed and fiat and seignorage currency that have comprised our base money supply. So, the private sector would be losing its own private credit, and then some, to the Fed over time. And then we wouldn't have a fiat debt-based currency or credit-based money anymore (since you need base money to back credit-based money), so I guess we'd be back to an asset-based currency — which is an entirely different discussion.

I've asked several times now and I'll ask again:  what are "net financial assets"?  I've combed through your MMR paper several times and the term is used in a contradictory way in that paper as well, so please provide a definition so we all know what you're talking about and have a basis for conversation.

Well, first of all, it's not my paper. Cullen Roche wrote the paper and knows far more about it than I do. All I can do is try to explain it to you as best as I can. If my explanations are inadequate, you might have more luck asking Cullen to explain it to you. He usually responds to questions.

As for net financial assets, this paper may help you:

http://rogueeconomistrants.blogspot.com ... asset.html

Finally, I would remind you that MMR/MMT are frameworks. They aren't perfect. They have flaws. All economic frameworks have flaws. You may not think that they do a good job of explaining how a fiat currency works, but I'm not aware of any other economic framework that even begins to attempt to explain how a fiat currency works.

[moda0306]

Gumby,

The "virtually risk free" nature of treasury debt before the fed (or, moreso, before the gold standard was abolished) seems to me to be just an acknowledgement of how permanent a large, stable government is likely to be... not an operational fact.  I think it's important to draw the line between "virtually risk free debt" of a large-and-in-charge currency user, and the risk free nature of what is essentially a "currency-issuing partnership" between the fed & treasury.

[Gumby]

Yes, I agree. My wording was flawed. What I meant to say is that Treasuries are really backed by Congress — not the Central Bank. Yes, the Central Bank helps provide a demand for Treasuries, but the government would still find a way to pay its bills if the Fed didn't exist.

Our money supply comes from debt. It's a "debt-based monetary system." It's amazing to me that those who disagree with that classification won't even address it no matter how many times I post this link...

http://en.wikipedia.org/wiki/Debt-based_monetary_system

...particularly when you have Fed officials saying things like:

"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

[moda0306]

Gumby,

Do you see much equivalence between the fed & treasury as we also see between the SS trust fund and the treasury (or gov't in general).

Social Security has "rules" that decide how much is collected and, moreso, how much is paid out.  The account that was "built up" after the increase in the FICA tax in the '80's was "invested" in special treasury instruments.  If a private pension plan held the same mix of assets nobody would have a fuss about it (they'd just be holding super safe investment instruments), but there are a couple groups that point out that they really don't hold anything.

One group is MMT/MMR (and many like them), stating that the trust fund is as irrelevant as the treasury's account balance at the fed.  It's simply an accounting gimmick (other than the fact that it shows how over-funded the program itself has been), and benefits could easily continue to be paid out even if it went to zero.  What REALLY matter is if there are enough productive, young, willing workers to take care of all the old people.  Hard to believe we'd have record high unemployment in a world where we can't find enough productive young people to produce stuff that old people want to consume.  

The other group is anti-Social Security activists, who are saying that the trust fund doesn't exist because it was simply spent by the treasury in other areas, and it's the equivalent of the right hand owing the left hand money.  They claim it's all just one big unfunded liability, and that it represents some sort of fraud on behalf of the government.

Basically, they're right in some ways.  It IS just the left hand owing the right hand.  They exaggerate certain consequences of that, IMO, but if the fund went to zero, the gov't could easily fund SS out of the general fund.  It amazes me that people who are trying to drill down to the true nature of the trust fund are predisposed to being so adament to deny that the treasury is basically a partner of the fed in issuing currency.  Neither could do it on thier own under current law, so they do it together in a ridiculous Gold Standard Polka.

[Lone Wolf]

Our money supply comes from debt. It's a "debt-based monetary system." It's amazing to me that those who disagree with that classification won't even address it no matter how many times I post this link...

http://en.wikipedia.org/wiki/Debt-based_monetary_system

Who's disagreeing with that classification?  Rather than paste the same link ad nauseam, it'd be more productive to be specific about where you think there's disagreement on a definition.  (It's doubtful that I'll reply but it could be useful for clarity.)

"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

Sure.  Our crushing debt is not the fault of the Fed, nor did they issue the MBSs that they have on their balance sheet.  They just purchase these things with electronically printed base money.

Now how about the rest of that speech you just linked?  I'm surprised that a Chartalist/MMT/MMR fan would enjoy it very much.  Fisher is talking about how dangerous he finds our current levels of debt and ballooning deficits:

Deficits and the unfunded liabilities of Medicare and Social Security are not created by the Federal Reserve; they are the legacy of Congress. The Fed does not earmark taxpayer money for pet projects in local communities that taxpayers themselves would never countenance; only the Congress does that.
...
It seems to me that those lawmakers who advocate “Ending the Fed”? might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house.

An even more dire warning from Richard Fisher here: (http://www.dallasfed.org/news/speeches/ ... 080528.cfm)

Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.

Yet neo-Chartalists argue that the debt just isn't big enough.  Their views and the views of the man you're quoting simply can't be reconciled.

Do warnings like these give you even the slightest pause?  Even if I found MMT convincing on an intellectual level (which I certainly don't), I think that I'd always worry that maybe debt really does matter the way that virtually all professional economists, Central Bankers, and the dude you just quoted say that it does.

[Gumby]

Who's disagreeing with that classification?  Rather than paste the same link ad nauseam, it'd be more productive to be specific about where you think there's disagreement on a definition.  (It's doubtful that I'll reply but it could be useful for clarity.)

I agree with all of it. Do you? It's only three paragraphs long. I think if we're going to continue this conversation, you ought to read it and actually comment on it.

Sure.  Our crushing debt is not the fault of the Fed, nor did they issue the MBSs that they have on their balance sheet.  They just purchase these things with electronically printed base money.

Well, if you agree with what he's saying, and if you agree with the three-paragraph WikiPedia page I keep citing, above, then you're agreeing that under normal operations the Fed would not be able to grow the private sector's financial net assets without the deposit of Treasury securities in the private sector. That's what I've been saying all along.

Now how about the rest of that speech you just linked?  I'm surprised that a Chartalist/MMT/MMR fan would enjoy it very much.  Fisher is talking about how dangerous he finds our current levels of debt and ballooning deficits:

He's a deficit hawk and an inflation hawk. I'm allowed to disagree with him on those points. Not really a big deal in terms of "operational realities." He's just letting politics cloud his opinions about what our fiat money should be spent on and whether or not it will cause inflation. Everyone's entitled to their own opinion on that. We can all agree to disagree on how much spending should take place. One doesn't have to be a dove to agree with MMT/MMR.

Yet neo-Chartalists argue that the debt just isn't big enough.  Their views and the views of the man you're quoting simply can't be reconciled.

As I said, it's just a different opinion. His opinion has nothing to do with the operational realities of where our money supply comes from. It comes from debt.

Do warnings like these give you even the slightest pause?  Even if I found MMT convincing on an intellectual level (which I certainly don't), I think that I'd always worry that maybe debt really does matter the way that virtually all professional economists, Central Bankers, and the dude you just quoted say that it does.

I have never, ever, said that deficits don't matter. The fact that you think this implies that you still don't understand MMT/MMR. What I have said is that our money supply comes from debt — something you just admitted to, above. And when the private sector has a balance sheet recession, MMT/MMR shows us that the debt needs to increase in order to provide the private sector with the new net financial assets it needs to avoid defaulting on its own private credit.

I'm allowed to disagree with Fischer on how much debt we need. But nobody is saying that deficits don't matter. They do. But, the reason they matter is only because large deficits can lead to inflation. But, let me be clear. There is no solvency issue for a fiat government, such as ours, when debts become too large. A fiat government can have as much debt as they want and will still be able to pay its bills. Even Harry Browne recognized this.

As far as I know, Richard Fischer doesn't claim that there is a solvency issue. He's just worried about inflation. And he has every right to be.

[moda0306]

LW,

It's not just one link... you're repeatedly completely ignoring a lot of our evidence to the effect that the treasury & fed, as a team, are our currency issuers in reality.  The treasury can't issue ACTUAL base currency per se (outside of coins), but it works with the fed and the fed makes sure there's ALWAYS a market for treasuries within the banking system... this makes treasuries as good as cash (as good as "base money") but have the bonus of spitting out interest.  Further, the treasury BY LAW is also a currency issuer of coinage.  This doesn't even take ANY detailed anlysis of how closely the fed & treasury operate... it's right on the surface.  The fed may appear to issue currency itself if you ignore huge, overarching operations with the treasury & member banks, but it coordinates extensively with the treasury, and HAS to ensure a stable monetary system and maintain target interest rates... something that's incredibly difficult if it allows the gov't to default.  This isn't just some random logical conclusion Gumby & I are coming to, it's built into the CORE of what it does when it sets overnight rates through operations in the treasury markets.

The only teeth the fed had to actually be a money issuer when it started was, besides an act of congress, convertability to gold.  There was no mechanism for the fed to engineer value for the dollar.  Are you really trying to say that with all the evidence we've shown, that the fed & treasury AREN'T simply two parties acting in partnership in the issuance of money?  Are we REALLY going to assume that the treasury is simply a currency user?  Why the heck have we been investing in T-Bills at .05%, even right up to the debt-ceiling debacle, if the treasury is just another currency user?  What's the purpose of even having a fiat currency if a few appointed bankers were "independent" enough to bring our entire financial system to a grinding hault by losing control of interest rates?  You may disagree with issuing a fiat currency, but if we DO have a fiat system, do you really wan't the gov't to contract it out to bankers, while later having to go into debt with that entity as a currency user?  Not only is this NOT effectively the system we have by any stretch of the imagination (somehow we get this "independent" entity to pay interest back to the treasury, an apparent lowly "currency user" that is on the cusp of default), I can't see how it's in any way ideal for anyone in the economy but the "contractors" at the fed, or, moreso, the banks they coordinate with.  It amazes me that a Harry Browne follower with Austrian leanings are having so much trouble admitting that the treasury has a very, very special place at the table with the fed, and we need to fundamentally reexamine their relationship beyond accounting identities and orders of operation (well, only some operations, apperntly the ones Gumby & I mention don't count) if we're to realize the true nature of where our money comes from and what our "national debt" truly is.

Also, as the reserve currency issuer, don't you see the need for higher levels of debt than would otherwise be the case?  This "crushing" debt you speak of are financial assets of the private sector that we're severely short of due to years of huge trade deficits in excess of our fiscal deficits.

Now that we don't have that link to gold, what is the force that boueys the value of the dollar? Wouldn't it be taxation, mostly?  The only mechanism the fed has to increase the money supply is to buy back financial asset with dollars that the treasury makes valuable by taxation.  The fed couldn't manufacture value of fiat money with some kind of convertability promise unless someone else is helping make it valuable.  The fed & treasury work together through member banks to make sure that treasuries will always be in demand at a set interest rate.  Isn't this the big huff with Austrians?  That rates are artificially low as set by the fed?  The bond market is the mechanism through which the fed controls rates.  They could do this through private debt, but they mostly don't, which is actually good for the market as it doesn't favor one kind of debt vs another... it just hits up the entity that we have issuing our currency in the first place: gov't.  The fact that these banks are holding US dollars means that even when rates are negative in real terms, the fed can arrange the market so the sale of treasuries will be a given at auction, because collecting some interest is better than collecting none.  In fact, if the fed let the treasury default, it would completely unhinge their entire control of interest rates. This isn't that difficult to see, and all the accounting gimmickry or order of operations requirements that exist as gold standard relics don't overcome the additional operations that have been added since we've been a sovereign fiat currency.  Our government, via the treasury & the fed, is the issuer of the U.S. dollar, and the sooner we agree on that, the sooner we can move on to debate macroeconomics in that context instead of repeatedly ignoring pertinent observations and debating the liquid nature of treasuries that HB figured out 30 years ago... you know... the guy that didn't even trust FDIC insured accounts?

If you're right I hope you have your "cash" portion of the PP in actual physical money, and you're not chasing yields after those treasuries.

[hoost]

Gumby/Moda,

From what I gather after reading more of "net financial assets" (from the link Gumby provided), it seems like it's being described as the total govt securites (national debt) minus govt securities held by the fed.  Is this accurate?

An example of financial assets being used as money would be when an entrepreneur sells his startup company to Google or something, Google will often pay him in Google stock for the stock of his company.

I sort of see this as direct barter vs indirect barter.  The entrepreneur exchanges something of value to him (shares in his company) for something else of value to him (shares of google).  As long as he can find someone who wants shares of google, he can make a trade with them.  But what if he wants to buy a loaf of bread, and the bread maker doesn't want shares of google?  This is where money comes in.  The bread maker knows he can use money to buy many other things that he wants, so the entrepreneur exchanges his shares of google for money with someone else who wants shares of google, then exchanges his money for the bread maker's bread.

I'm not saying we'll see grocery stores accepting stocks/bonds any time soon, but one thing that's important to point out is that MMR, Gumby and myself tend to think that the "moneyness" of assets on your financial balance sheet is much less important than the makeup of the balance sheet itself.  By "Important" I mean in terms of whether we'll decide to spend or how we decide to invest, or whether we want to invest in another currency.  Our technology is getting to a point where we very well could probably start paying for stuff with electronic-based financial assets that aren't dollars... it'd be clumbsy and unnecessary, but possible... but it's less important that they can act as money, and more important how the asset side of our balance sheets interact with the liability side, and how our expected future cash flows will service those liabilities.  This is why MMR concentrates on "NFAs" so much... because the lack of a corresponding TRUE financial liability adds certain stabilizing aspects to our balance sheets in the private sector.

I'm not sure that I follow you on the "moneyness" vs makeup of balance sheet theme.  Could you please elaborate?

I would argue that a checking account is pretty much electronic based financial assets that aren't dollars.  This is the whole idea of bank credit vs. base money.  Base money is federal reserve credit, which is where paper dollars come from.  Bank credit is used as money.

No base money is created or destroyed.

When we say "base money is destroyed" or "created" we are talking about the private sector's point of view. In other words, "base money is removed from the private sector" or "base money enters the private sector". My apologies if that wasn't clear to you.

When you talk about base money from the private sector's point of view, I think it would indeed be more accurate to say that base money is either added to or removed from the private sector.  The base money is still in existence if it is moved from the Reserve Balances row of the Fed's balance sheet to the U.S. Treasury General Account row.

The Treasury is both a currency user and a currency issuer.  However it doesn't issue Federal Reserve credit; it can only issue coins.

Not true. The Treasury issues Treasuries — which represent the private sector's risk-free assets and savings. We know this from our own experiences because our Permanent Portfolios are mostly comprised of Treasury securities — they are our largest asset.

Which part is not true?  The only currency the Treasury can issue is coins.  Treasuries are not currency.  Treasuries are a debt obligation of the federal government.  Treasuries can become currency if the Fed buys them and issues currency in exchange.  Moreover, the fact that the PP holds treasuries doesn't confirm or deny whether or not they're currency.  The Treasury uses currency to pay interest on its debt obligations not held by the Fed.

In this scenario, MBS are base money.

No, MBS are not base money. Not sure how you've come to that conclusion. You can't buy a Treasury Bond at auction with MBS. You can't pay taxes with MBS. MBS are not legal tender and cannot be base money. MBS are private credit instruments. In order to fulfill the interest and principal payments, it requires real base money dollars. MBS can be swapped for base money. Is that what you meant?

You assert that Treasuries are base money, and claim the MBS are not base money.  In reality, neither are base money.  Base money is created by the Federal Reserve and issued in exchange for assets.  The assets that are currently held on the Fed's balance sheet that have been exchanged for base money include $1.6 trillion in US govt securities (approximately 15% of the total outstanding securities, the remainder would be what you are calling "net financial assets"), $850 billion in mortgage backed securities, $11 billion in gold, $44 billion in Treasury currency, and various other debt obligations.

Take a gander at the Fed's balance sheet.  http://www.federalreserve.gov/releases/ ... nt/h41.htm

This means that the Fed has monetized the MBS, just as it monetizes some of the treasury's debt.  If you are going to argue that treasuries are base money, that makes these particular MBS base money as well.  In reality, it means that $1.6 trillion in base money is backed by treasury debt, and $850 billion is backed by mortgage backed securities.

The Fed can never take a loss.

Not exactly. The Fed had a $2.7 billion (paper) loss on Bear Stearns:

The Federal Reserve on Thursday said it had suffered a $2.7bn paper loss on the $29bn portfolio of toxic assets it took over from Bear Stearns in March as part of JPMorgan Chase’s government-brokered takeover of the stricken investment bank.
Source: http://www.ft.com/intl/cms/s/0/bc104618 ... z1uwj3PVGP

But, I understand what you are trying to say. The Fed doesn't have to acknowledge a loss, since it doesn't carry assets at their market value on its books. Anyway, it really doesn't matter because the Fed is the most profitable bank in the world — thanks income from Treasuries. All of its profits are returned to the Treasury.

You're correct, what I said was imprecise.  In reality, if the Fed takes a loss, it serves to destroy base money since the reduction in assets would have to correspond to a reduction in liabilities.  This reduction would presumably have to come from the Treasury's general account; meaning essentially that the treasury is subsidizing the losses on Fed investments.  The cash flows would work out such that the Fed is just returning less of the interest payments it receives from the Treasury back to the Treasury.

The Fed doesn't hold Treasuries because they are risk free.  Treasuries are risk free because the Fed holds them.

Treasuries aren't backed by the Fed. Treasuries are obligations of the US Treasury. As I mentioned the Dallas Fed quote from a few pages ago, the Fed would not even be able to monetize the debt if the debt did not exist in the first place.

"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

Treasury's bonds also existed before the Fed existed and have always had virtually no credit risk to them. The Fed doesn't need to exist for Treasuries to be risk free. The Fed is certainly crucial within the current framework, but the Fed is not a crucial entity that needs to exist for our Treasuries to be risk free. We could simply "end the Fed" and write a new law to retire the debt. Our government would simply give money creation powers to the Treasury if the Fed was dissolved. And over the long run, the Fed cannot create enough base money for the private sector without Treasuries — otherwise the private sector would be handing all of its private credit assets over to the Fed for every base dollar to exist and then eventually run out of assets paying off the principal and interest on those assets.

Treasuries are implicitly backed by the Fed.  This is what makes them risk free.  If the Fed couldn't create new money, there would be default risk.  I could understand an argument that even without the Fed the Treasury could simply print a coin and set its value arbitrarily and use that to cover the debt.  I would argue, though, that people would see right through that and stop accepting the Treasury's coins, which is why they don't do it.

The Fed holding MBS creates base money.

If all of the credit and debt in the entire economy (public and private) were paid off, you would be left with gold and treasury coins backing the remaining Fed currency.

Yes, though I'll also point out that fiat Greenbacks, seignorage, as well as gold and silver, have all contributed to the base money supply since the founding of our country.

How has seigniorage contributed to the base money supply?  My understanding is that seigniorage reflects the cost of issuing money.  For a coin, this would be the premium that you pay above spot.  For Fed money, this would essentially be the operating costs of the Fed (since excess interest earned above operating costs is returned to the Treasury).  My understanding may be wrong, so please elaborate.

But the private sector would eventually be unable to pay the interest to the Fed on those MBS after the principal was paid down without handing over some of the remaining asset-backed and fiat and seignorage currency that have comprised our base money supply. So, the private sector would be losing its own private credit, and then some, to the Fed over time. And then we wouldn't have a fiat debt-based currency or credit-based money anymore (since you need base money to back credit-based money), so I guess we'd be back to an asset-based currency — which is an entirely different discussion.

This is an interesting line of reasoning, and I think an important one that warrants further investigation.  My mind has started to go down this path as well.  It seems to me that at the end of the day, you always start and end with an asset based currency.  The question is who ends up with the assets at the end?  I don't have that answer yet, but I can take a few guesses.

Finally, I would remind you that MMR/MMT are frameworks. They aren't perfect. They have flaws. All economic frameworks have flaws. You may not think that they do a good job of explaining how a fiat currency works, but I'm not aware of any other economic framework that even begins to attempt to explain how a fiat currency works.

I agree that MMR/MMT aren't perfect, but the way the discussion has been going up until now I haven't got the impression that you felt that way.  What we need to figure out is why they're not perfect so that we understand the limitations of the hypotheses.  I think there is a lot of good reasoning within the frameworks, but it seems like there may be some imperfections, and I'd like to sort through them more as an intellectual exercise than anything.  If we are using an imperfect model to try to manipulate the economy without understanding where it breaks down, I think we'll always find unintended and unexpected consequences.

[hoost]

LW,

It's not just one link... you're repeatedly completely ignoring a lot of our evidence to the effect that the treasury & fed, as a team, are our currency issuers in reality.  The treasury can't issue ACTUAL base currency per se (outside of coins), but it works with the fed and the fed makes sure there's ALWAYS a market for treasuries within the banking system... this makes treasuries as good as cash (as good as "base money") but have the bonus of spitting out interest.  Further, the treasury BY LAW is also a currency issuer of coinage.  This doesn't even take ANY detailed anlysis of how closely the fed & treasury operate... it's right on the surface.  The fed may appear to issue currency itself if you ignore huge, overarching operations with the treasury & member banks, but it coordinates extensively with the treasury, and HAS to ensure a stable monetary system and maintain target interest rates... something that's incredibly difficult if it allows the gov't to default.  This isn't just some random logical conclusion Gumby & I are coming to, it's built into the CORE of what it does when it sets overnight rates through operations in the treasury markets.

It seems to me that the source of disagreement/confusion here has to do somewhat with semantics; as I've stated before, I think semantics are important.

I think both groups agree that the Treasury and Fed work together to convert Treasuries from a security into base money.

I think LW has issues with the idea that the Treasury can issue coins without the Fed.  The Treasury has the right and ability to mint coins and set the value of them.  For example, a gold eagle is $50 in legal tender.  While the Treasury could theoretically mint a $1 billion coin, it's unlikely they would ever do it (or is it?).

I think Moda/Gumby seem to have issues (although I think they may have come around) with the idea that the Fed doesn't need Treasuries to create base money.  The Fed is not required to buy Treasuries, and can in fact issue base money against any asset it wants.  While the Fed could theoretically purchase $850 billion in mortgage backed securities with money it created out of thin air...oh, they already did that.

The reason they used the Fed's printed money to purchase these securities vs. having the Treasury mint a coin to purchase them is that the system is so complicated that most people don't realize what is going on.  The net effect on the govt is the same, but there are a lot more smoke and mirrors when it's done this way, and that helps to sustain the legitimacy of the currency.  If the Treasury minted a coin to facilitate the transaction, the people would see the system for what it really is.  Now the Treasury still subsidizes any of the losses taken on these securities through a reduced "refund" of interest payments (similar to the way the Treasury pays the operating expenses of the Fed through a reduced refund of interest payments).

What's the purpose of even having a fiat currency if a few appointed bankers were "independent" enough to bring our entire financial system to a grinding hault by losing control of interest rates?  

Anyone remember 2008?  The currency almost did collapse.  The Fed may not be independent but the commercial banks are (sort of), and they have the ability to create far more money than the Fed does.

[moda0306]

Before I address other points, 2008 was hardly a "currency collapse."  Various parts of the private credit system collapsed or almost collapsed, but it's important to separate that from a "currency collapse" (implying hyperinflation... the opposite of what almost happened), or having a currency pre-designed to be completely unworkable or a tool of big banks (in spite of the problems with the banks, the fed is latched to the treasury in various ways that prevent a complete undemocratic banking cartel takeover IMO).

Gumby & I have always realized the fed can buy MBS's and the like... what we're saying is that it's kind of a non-starter to assume we can build base money on buying various forms of private sector debt & financial instruments.  It lends itself to extreme bias towards certain types of debt and therefore huge political implications.  With the treasury, not so much, because since the fed is an act of congress the currency is essentially issued by government anyway.  Any bias towards treasury bonds is simply an acknowledgement of a role the government has already taken on... that of currency issuer.  I also can't really articulate it, but the idea that the fed could build a base currency by buying financial instruments engineered by parties in the private sector denominated in that currency seems like a Catch 22 to me... or something like that.  So not only is it undesirable and uncommon, it seems logically impossible on a macro level in some ways.  Some of our arguments here might be a back and forth reconciliation between what the treasury/fed CAN theoretically do, and what they commonly do, and trying to reconcile all those combinations of probabilities and possibilities into trying to view the system for what it really is.

Treasuries are not technically base money, but Gumby & my point is that they might as well be given the basics of the system.  That's why we invest with the framework that treasury interest is the "risk-free" rate, and everything higher than that is payment for default risk.  All these "semantic" rules that you deem important are simply rules of a gold standard era that have been short-circuited by new rules designed to use the old system to engineer us a sovereign fiat currency.  The fed really can't engineer the value of the dollar it once did when it guaranteed convertability.  Now it NEEDS the treasury to create the tax sucking sound to give the dollar value.  It really has a fundamentally different role, now as a partner, in its task of issuing currency.

Treasuries are effectively currency due to the commonly used fed short circuit.  They are viewed as fundamentally different assets by the private sector when investing.  Once again, we're trying to look at these for what they truly represent given the totality of the system, not just what accounting identities try to tell us they are.  They're essentially savings accounts at the fed... uber-liquid.  You say that without the fed there'd be default risk to treasuries.  Well first we'd have to assume treasuries are denominated in gold or some other currency as there'd be no US dollar without one of the essential current partners in currency issuence (the fed).  Gumby and I fully realize that with the way the systems rules are still set up, despite the short-circuit the fed does to work with the treasury to create a soveriegn fiat currency, that the fed is still an absolutely necessary piece of the currency-issuing role.  No question.  But the treasury isn't really a currency "user" if its account at the treasury can't reach zero based on the fed & member banks actions to manage interest rates.  It's really a mistake to view them as such.  They're a co-issuer in reality.

[Gumby]

I think LW has issues with the idea that the Treasury can issue coins without the Fed.  The Treasury has the right and ability to mint coins and set the value of them.  For example, a gold eagle is $50 in legal tender.  While the Treasury could theoretically mint a $1 billion coin, it's unlikely they would ever do it (or is it?).

Right. The Treasury mints debt-free coins all the time. All the profit gets swept into the general fund and reduces the government's need to borrow. Says so right on the Treasury's website. I don't believe the Treasury will ever mint a $1 billion coin, unless it feels it has no other choice to save the government.

I think Moda/Gumby seem to have issues (although I think they may have come around) with the idea that the Fed doesn't need Treasuries to create base money.  The Fed is not required to buy Treasuries, and can in fact issue base money against any asset it wants.  While the Fed could theoretically purchase $850 billion in mortgage backed securities with money it created out of thin air...oh, they already did that.

Uh, no. We never said the Fed can't do that. We just said that swapping MBS for base money (or any other private credit asset) is not an ideal situation, since that just ultimately causes the private sector to lose net financial assets, over time, as the principal and interest is paid off to the Fed.

When the Fed swaps out MBS — to create base money — no new net financial assets are created. (I know that's a confusing term for some, but it's true). So, when the Fed builds our base money supply, it's not all that helpful to just liquidate the private sector's own private credit assets and turn them into base money — particularly when the private sector still needs to pay those private credit assets off, plus interest — all with the base money it was given for the MBS in the first place. The interest payment — from the private sector to the Fed — actually causes a net financial drain for the private sector.

Since the issuance of Treasury bonds creates new net deposits of financial assets into the private sector — those Treasuries assets literally act as private sector savings. And those new risk-free Treasury assets make an ideal asset on which to convert into new base money, as needed. Otherwise, you're just robbing the private sector of its limited net financial assets and sucking interest payments into the Fed. Far better to swap freshly printed Treasuries when you need to increase the money supply.

[moda0306]

Gumby,

I think what's happening that we need to point out is that you and I are focusing on the makeup & amount of financial assets in the economy, as we think (based on observations of MMT/MMR) that these drive peoples decisions much, much more than simply base money supply.

I think looking at all this in terms of base money, not the broader picture of both privately created and publicly issued financial asset, liabilities and investments that back them is the crux of the misunderstanding of what MMR is trying to get to above and beyond the fed & treasury basically being co-issuers of currency.

[Gumby]

I think looking at all this in terms of base money...is the crux of the misunderstanding of what MMR is trying to get to above and beyond the fed & treasury basically being co-issuers of currency.

That's probably true. I was just trying to point out the raw problems with using private credit to back our currency. It's a bad idea when you play it out with interest payments.

I mean, what is the yield on a MBS these days? I'm guessing, there's at least a 1% or 2% spread between Treasuries and MBS. So, let's say 3.5% for 15-year MBS and maybe 4.5% for 30-year MBS? Maybe more?

Now imagine the Fed swaps $8 trillion in cash into existence by swapping out $8 trillion in MBS. But, that means that, over time, the private sector has to hand over the $8 trillion in principal payments and roughly 3.5% or 4.5% in interest payments on that $8 trillion, to the Fed, using the same pile of (base) money that was swapped into existence by the MBS. Only, the MBS swaps didn't create enough base money to pay off the 3.5% to 4.5% in interest payments. So, using MBS (or any other private credit asset) to back our currency basically screws the private sector, by draining its assets. Far better for the Treasury to be responsible for delivering interest payments to the Fed — which ultimately get returned to the Treasury after the Fed takes what it needs to operate.

The whole "we can back our currency with MBS" argument makes no sense when you play it out with interest payments.

[hoost]

I think we're finally getting close to the same page.  I'm not sure that anyone said it was a good idea for the Fed to buy MBS, just that they can and they have.

I assume since neither of you challenged my understanding of net financial assets (total treasury debt outstanding - treasury debt held by fed) that you share this understanding of the concept.

This also means that currency or base money is separate from net financial assets.  And that the Fed has nothing to do with net financial assets, unless it removes them by turning them into base money.

---

Another question I have is what happens when a government defaults on debt?  For instance, what if the state of California defaulted on its bonds?  How are the bond holders compensated?

If a company defaults on its bonds, the bond holders are entitled to its assets; is this the same for a government?

[Kshartle]

If a company defaults on its bonds, the bond holders are entitled to its assets; is this the same for a government?

The rights of creditors need to be enforced ultimately by the guns and dungeons of the state. I think it's unrealistic to assume anyone can force the government to sell assets and make good on their debts. They have all the guns and cages to put the slaves in. And if they do go the asset selling route then they are essentially not in default. The difference with the state is the choice remains with them whereas with a company the threat of violence against the debtors by men in blue costumes is always present.

[moda0306]

Both treasury debt and cash are NFA's.

[hoost]

Both treasury debt and cash are NFA's.

How did we define cash again?  Seems like you're double counting.

[moda0306]

Cash is reserves, coins (legal tender), and green paper money.  Think of it this way... Cash is an asset without a corresponding liability of the private sector.  So is a treasury bond. 

[MachineGhost]

Anyone remember 2008?  The currency almost did collapse.  The Fed may not be independent but the commercial banks are (sort of),

That's pure rubbish.  There was a flight to safety into the currency and Treasuries. i.e. deflation.  What really happened was the commercial paper and the collaterized-mortgage debt markets of Wall Street came to a screeching halt due to lack of transparency of counter-party risk, i.e. sell first and ask questions later.  The rest of the so-called negative effects was all fear-mongering and theatrics to engineer a fiscal policy bailout to save the bondholders of the affected investment banks.  In reality, the damage to Main Street would have been very limited.  While I don't advocate avoiding "creative destruction" for allocating society's scarce resources, the ramifications of General Motors failing would have been way more severe to Main Street than any of those largely useless investment banks with their largely overpaid employees with their largely useless jobs.

I think people need a reminder sometimes that the Fed was specifically instituted under a "gold standard" to bail out Wall Street when it fucks up, so the Top 1% could stop bailing out the Treasury.  The Fed may have adopted more roles of self-justification over time, but that is still putting lipstick on a pig.

[MachineGhost]

Cash is reserves, coins (legal tender), and green paper money.   Think of it this way... Cash is an asset without a corresponding liability of the private sector.  So is a treasury bond.  

In common parlance, cash is actually that "green paper money" which are correctly termed Federal Reserve Notes of zero duration.  

So I think what you really mean is the M0 money supply is composed of the monetary base, Treasury coins and Federal Reserve Notes, the latter two which are also legal tender (because they used to be composed of "lawful money": gold/silver of specific weight/purity or was a "warehouse receipt" to exchange for such).  The monetary base composition is restricted by Congress via the Federal Reserve Act.

[hoost]

Cash is reserves, coins (legal tender), and green paper money.   Think of it this way... Cash is an asset without a corresponding liability of the private sector.  So is a treasury bond. 

Yes, but $1.66 trillion worth of the reserves and green paper money are liabilities backed by treasury bonds.  Also, $44 billion of reserves and paper money is backed by treasury currency (which I presume is coins, but could theoretically be old outstanding notes).

So if you count all of the treasury bonds and all of the cash, you're doubling up because some of the cash and reserves were created from/exchanged for treasury bonds and treasury currency.

[Gumby]

So I think what you really mean is the M1 money supply is composed of the monetary base, Treasury coins and Federal Reserve Notes, the latter two which are also legal tender (because they used to be composed of "lawful money": gold/silver of specific weight/purity or was a "warehouse receipt" to exchange for such).  The monetary base composition is restricted by Congress via the Federal Reserve Act.

To clarify, I believe the monetary base is "M0". (M1 would also include traveler's checks, demand deposits and "other checkable deposits").

Hoost, I think if you're really going to try to understand MMR (I say, skip MMT, since it involves untested prescriptive theories, such as the 'Job Guarantee'), you need to look into the concept of vertical and horizontal money. Vertical money is what changes net financial assets. When banks and institutions issue horizontal money (i.e. private credit — with liabilities that net to zero) it has no affect on the private sector's net financial assets.

When the Fed swaps base money for an asset of the private sector (MBS, Treasury, agency debt, whatever) it doesn't change the private sector's net financial assets. That's confusing because if the Fed gives the private sector base money in exchange for MBS, it seems like the private sector just got free money in exchange for an asset that nets to zero. But, that's not true, because once the swap happens, the private sector needs to fulfill the liability on the MBS (i.e. pay back the credit, plus interest, to the Fed — essentially using the very base money it was given). So, the entire transaction with the Fed still nets to zero.

When you really start to understand this perspective of horizontal and vertical money you start to realize that a net deposit of Treasuries in the private sector is where the real government "spending" comes from — that is to say that the net issuance of Treasuries, in our current financial system, is what grows the net financial assets of the private sector.

And when that starts to make sense you begin to realize that the government's reserve accounting might as well be fictional — other than to keep up appearances/legal obligations.

Warren Mosler explains:

When the government “spends,”? the Treasury disburses the funds by crediting bank accounts. Settlement involves transferring reserves from the Treasury’s account at the Fed to the recipient’s bank. The resulting increase in the recipient’s deposit account has no corresponding liability in the banking system. This creation is called “vertical,”? or exogenous to the banking system. Since there is no corresponding liability in the banking system, this results in an increase of non-government net financial assets.

When banks create money by extending credit (loans create deposits), this occurs completely within the banking system and results in a liability for the bank (the deposit) and a corresponding asset (the loan). The customer has an asset (the deposit) and a corresponding liability (the loan). This nets to zero.

Thus vertical money created by the government affects net financial assets and horizontal money created by banks does not, although its use in the economy as productive capital can increase real assets.

The mistake that is usually made is comparing what happens in the horizontal system with what happens at the level of government accounting. At the horizontal level, debt is the basis for horizontal money creation. Therefore, it is often assumed that debt must be the basis for the creation of money by government currency issuance. This is not the case.

Reserve accounting uses the standard accounting identities, but the meaning of “liability”? is not “debt.”? The husband-wife analogy for Central Bank-Treasury accounting relationships is apt. Since a husband and wife are responsible for each others debts, neither can be indebted to the other. That is to say, reserve accounting is a fiction that does not represent real relationships, such as exist between a creditor and debtor in the horizontal system.

Moreover, government debt is not true debt either. At the macro level, the reserves that are transferred to banks through government disbursement are used to buy Treasury’s. That is, when a Treasury is bought, this involves a transfer of reserves from the buyer’s bank’s reserve account at the Fed to the government’s account (consolidating Central Bank and Treasury as “government”?).

When the Treasury’s are sold or redeemed, the reserves that were “stored”? at interest are simply switched back, creating a deposit again. It’s pretty much the same as buying and redeeming a CD. It’s just a switch from demand to time back to demand in a bank account, and a switch between reserves and securities at the government level. That is to say, the government doesn’t have to draw on revenue, borrow, or sell assets to cover its “debt,”? as households and firms do. It’s just a matter of crediting and debiting accounts on the (consolidated) government books, even though it may appear that there is a financial relationship occurring between the CB and Treasury due to the accounting. However, it’s just a fiction.

Therefore, the key to understanding Modern Monetary Theory is this vertical-horizontal relationship. When one understands this, then Abba Lerner’s principles of functional finance become obvious. (1) Currency issuance through government disbursement is used to increase non-government net financial assets, and taxation withdraws net financial assets from non-government. (2) Debt issuance by the Treasury is a monetary operation for draining reserves to permit the Central Bank to hit its target rate.

These principles are then applied to Y+C+I+G+NX to balance nominal aggregate demand with real output capacity in order to achieve full capacity utilization, hence, full employment, along with price stability. This is based not on theory requiring assumptions but on operational reality that can be represented using data, standard accounting identities, and stock-flow consistent macro models.

Source: Warren Mosler

Note: The last paragraph about the "Y+C+I+G+NX" relates to MMT's theoretical/untested prescriptions for achieving full employment and maximizing productive capacity with a fiat monetary system. MMR avoids those untested labor theories/prescriptions. I prefer MMR since it just focusses on the operational aspects of the fiat monetary system.

Now MMR agrees with this definition of horizontal and vertical money, but my understanding of MMR is that MMR tends to look at money creation from a more "diagonal" approach. That is to say that the private sector's own horizontal money creation (which does not affect net financial assets) is more powerful than MMTers might want to believe.

But the explanation from Mosler, above, explains why MMT/MMRers believe that the government's reserve accounting (including the Treasury's "account") is really just stated for (legal) appearances.

[Gumby]

Many people also overlook the interest payments on the vertical and horizontal assets. But, if you think about it, the interest payments on horizontal money can't be made without a fresh supply of vertical money (unless you issue more private credit, to infinity).

This phenomenon is explained in the three paragraph link that I've been posting since the beginning of this thread — and LW never responded to ...

http://en.wikipedia.org/wiki/Debt-based_monetary_system

Hence, the National debt is pretty much designed to grow forever if the interest on private credit is to be paid.

But, as Mosler explained above, the "debt" is really just an accounting gimmick (for legal purposes) that enables the government to create net financial assets for the private sector. Of course, these net financial assets actually represent real goods and services within the private sector.

[moda0306]

hoost,

Viewing base money as "backed" by debt in a traditional way is a mistake.  It's all just paper made valuable by taxation & legal tender laws.  It takes a fundamentally different arrangement to make confetti valuable if there is no "IOU" there for something that actually does have intrinsic value... I think we need to pull this back to the basic difference between fiat & pegged or commodity or contract currency.

If a base currency of gold is in common use and the basis of a broader gov't currency, then the central bank can generate value of paper money simply by guaranteeing a fixed redeemable value of gold.  The treasury, then, in many ways is still just a user of currency, because everything is "backed" by gold.

A sovereign fiat currency is often issued by a central bank, with some appearance that the gov't is a USER of the currency, but in reality the relationship is anything but.  A central bank, on its own, cannot engineer the value of something that it offers nothing in return for.  In a fiat world, that is the role of taxation and legal tender laws (I'd argue much more so the former than the latter... ie, we'd still use dollars if there were no legal tender laws).  If the relationship with the treasury is as ours is, it's essentially a government-issued currency, not really "backed" by debt in a traditional way.  Both cash AND treasury bonds are financial assets.  In fact, T-bills have never looked so much like cash as they do today.  The fact that within the gold-standard-set rules we issue debt to spend doesn't mean that only one of them are truly a financial asset and the other is not.

In the end, between the treasury & fed, they put a mix of "NFA's" on the balance sheets of Americans.  The AMOUNT of these, whether cash or bonds, that exists on our balance sheet in relation to our other financial assets, as well as our need to service debt, is what truly drives our economy (beyond, of course, our productive ingenuity, liberty, etc... all those other good things that make us a productive powerhouse)... surely not whether some of it is M0 vs T-Bills paying .08% interest.  It truly helps to look at balance sheets, balance sheets, and then maybe balance sheets... before you look at some limited interpretation of "money supply."  It helps explain why things are working or will work SO much better than looking at M0... it helps us dispense of trying to decide what constitutes money, and looking at what people have in terms of reasonably liquid purchasing power in relation to their debt-service instead... 100x more useful IMO.

Here's one exercise I like to use to try to help myself and others visualize the relevance of "public" debt/money to a currency user in the private sector with a financial balance sheet:

Imagine you hold $50,000 in a treasury direct account in 1 year T-Bills paying (let's set the clock back a bit) 1% interest.  You're collecting $500 per year in interest and have an uber-safe (nominally) uber-liquid financial asset.   You view this asset that way, but you also view it, correctly or not, as "debt" of the federal government that they have to pay you back in dollars.  You can't go to the grocery store with the money, but 1) you could easily trade it for cash in a heartbeat as the market views it as super-duper liquid & safe, and 2) you aren't saving to collect interest... you're saving to consume some time in the future.  This need will be there whether your savings bears interest or not.  This need will be there whether the treasury is losing 1%-3% to inflation or not.

Now let’s say one day you wake up and all your $50,000 has been converted to cash (let's assume you can hold cash in a TD account... I'm not even sure if you can).  You've missed out on one day ($1.37) of interest, but for the most part are just baffled as to what happened... no sweat off your back though, right?  You're not going to go buy an RV simply because it's cash now, the gov't isn't going to not be able to hire somebody or fix a road, you're not going to buy a car or plan a vacation... you're simply going to either 1) keep it in pure cash, 2) buy another 1-year treasury, or 3) buy something different that offers you better terms.  Your purchasing power hasn't changed.  Neither has government's.  You're 100x more likely to simply invest a bit differently than to go consume a bunch of crap.

Now pretend for a second that didn't happen... pretend, instead, that you woke up and noticed that instead of $50,000 in T-Bills, you now have $100,000 in T-Bills.  How would you feel then?  Would you feel like you were limited in your ability to spend that extra $50,000 in wealth because it was in the form of 1-year bonds, and not cash?  You can't take that $50k in extra T-Bills to the grocery store (though I'd argue this is more out of convenience for the store than some rejection of T-Bills as liquid financial assets), but do you really feel less liquid?  Now you WOULD consider buying that RV or planning a vacation... and you would likely NOT wait a year for it to convert to cash before you view it as spendable... the market sees it as so liquid that it doesn't care if you want to consume now.  You now WOULD be more likely to consume (I'm assuming you're a normal person that, if they came accross $50k of wealth in any form, would change their habits a bit).  You would feel richer.

The point of this is to illustrate how the asset/liability layout of our balance sheet, regardless of whether something is legal tender or not, is MUCH more important than whether something is technically money vs debt in terms of how we see it and how it will affect the economy.  Instead, people tend to argue about looking at M0 vs M1 vs M2 and how much "monetary inflation" vs "asset inflation" vs "price inflation" vs "wage inflation" we have and these are good things to look at, but our financial balance sheets, and the debt-servicing requirements of the liabilities on that balance sheet, that drive demand and the price level much more than detailed breakdwons of what is money vs not really money.

I hope that clarifies my position, as well as maybe the way Gumby looks at it (not sure if this is how he likes to view it to help him visualize the drivers of the system).