Here's What Happened The Last Time The Fed Owned All Outstanding Treasuries

[melveyr]

I second all of this. I was an extreme anti government libertarian throughout college and I fully bought into the Austrian explanation of the economy. Over the last five years, my understanding of the world has evolved. MR / MMT was a revelation for me and though there are many aspects and details of it that I dont understand yet, Ive come to realize that the Peter Schiffs of the world dont have a firm grasp of the mechanics of our system when they start spouting off about hyperinflation.

I actually dont see money and the state as antagonists anymore. Im coming to the belief that money cant exist without the presence of the state.

you a libertarian? and an extreme one at that
based on things you say about what libertarians believe, i am assuming this is humor....

MR is worth trying to understand, and the little i do understand of it hasn't changed my libertarian views one bit. the government having to spend or go into debt to create money, doesn't equal government must get bigger, more intrusive and spend money on crony corruption, boondoggles and intrusive private-sector killing regulation. i doubt we can ever overcome the inherent  push toward doing those things our fiat dollars cause, and i would prefer to see us experiment with alternatives. but fiat is the system we have and pushing for limited government within it still seems to make sense.

Simon,

That is exactly what I am talking about  Understanding how the government operates and the constraints it does/doesn't have does not mean you have to condone it!

Personally, I don't like our current monetary system because it is very difficult for the politicians to understand meaning that they will inevitably screw it up. However, I still aggressively try to learn as much as possible about it so that I can structure my portfolio to profit from it regardless of whether or not I think the system is the best one to have.

[moda0306]

I don't think there's too much about the operational aspects of MR that one can actually try to articulately disagree with, especially when reading the work of poster "JKH" over at monetaryrealism.com.  Truly unbelievable stuff with very little political bias.  He just describes the relationship of the fed, the treasury, and member banks.

I think where arguments start to occur is how the private sector will react if the aforementioned system does one thing or another. There are phenomenal discussions at that site, as well as pragcap, about this piece.  MR is just a starting point showing that default is not really likely.... Whether hyperinflation is a mirror image of default in a fiat world, or something else entirely, is the true debate.  Also, what short and long term economic problems are we making for ourselves in terms of real resources and moral hazards I think is where a ton of the debate belongs.

This business about the fed and the 1940s is amazing btw... I had no idea.  Why wasn't Krugman shouting this from the rooftops earlier, or someone at pragcap/mr? 

[D1984]

But interest rates can only fall to zero so long as there is such a thing as physical money (when I say "physical money" I'm not even talking about gold...even physical paper money will do the trick) because no one will lend money out at a negative nominal rate when they can just sit in paper cash and earn 0%. What is supposed to happen when desired savings at any one time are greater than desired investment and you are still at the zero lower bound?

Ever heard of asset confiscation?

In 1933 it was done by forcing everyone to turn in their gold for $20.67/oz and then repricing the dollar from 1/20oz to 1/35oz of gold.

Next time it will probably be something different.  Maybe:

01Feb2000: When you look at the mistakes of the 1920s and 1930s, they were clearly amateurish. It is hard to imagine that happen
ing again - we understand the business cycle much better.
19Apr2009: With unemployment rising and the financial system in shambles, it's hard not to feel negative about the economy right now... Why not lower the target interest rate to, say, negative 3%? At that interest rate, you could borrow and spend $100 and repay $97 next year... The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less. Unless, that is, we figure out a way to make holding money less attractive. At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that. Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10%. That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3%, since losing 3% is better than losing 10%.

I do recall reading that piece (presented by Mankiw as an idea one of his students came up with...said student wished to remain anonymous) but my question was that given no Fed and little or no government intervention (i.e. Kshartle's idealized scenario) what would happen when we reached the zero lower bound and the amount the various ecomonic actors in the economy desired to save (even earning 0%) was greater than the amount other economic actors wished to borrow for productive uses or for consumption and how would a 100% pure free market solve it without resorting to vaporizing a percentage of someone's paper cash.

Having said that, I wouldn't put it beyond our government to try something like this if it got desperate enough (although they might get some squawk from the courts...even under the legalized thievery allowed by the Kelo decision, "takings" have to be compensated. Simple theft of someone's nominal purchasing power--by making 1/10th of their currency useless overnight--would be going even farther than taking their gold and giving them the then-official market value of $20.67 for it) but I don't think a "solution" involving outright asset destruction would be something either I or Kshartle had in mind in a discussion about a workable free market solution for the zero lower bound.

[D1984]

What is supposed to happen when desired savings at any one time are greater than desired investment and you are still at the zero lower bound?

What are desired savings?

Quote from: D1984 on April 04, 2013, 05:17:45 PM
But interest rates can only fall to zero so long as there is such a thing as physical money (when I say "physical money" I'm not even talking about gold...even physical paper money will do the trick) because no one will lend money out at a negative nominal rate when they can just sit in paper cash and earn 0%. What is supposed to happen when desired savings at any one time are greater than desired investment and you are still at the zero lower bound?

Please restate this. I think there is a real question dying to get out but it's cloaked in nonsense that I can't understand. I might be too dumb.

Maybe I should have been more explicit about what "desired savings" and "the zero lower bound" meant as I was describing them. My bad.

"Desired savings" is the amount of income that every economic player (invidividuals, corporations, households, small businesses, not-for-profits, etc) desires to save out of the amount that they earn. If total income (including profits, interest, dividends, wages, etc) in the economy is $10 trillion and people desire to save 10% of that, then desired savings is $1 trillion dollars.

Now, economic actors may choose to save or invest/consume a greater or lesser percentage of their income depending on what economic conditions they foresee in the future and on what rate of return they can currently get on savings. Sometimes the amount economic actors desire to save is greater than the amount desired for investment/consumption at any given rate. This normally wouldn't be a problem (with or without the Fed); as the amount of desired savings (the good supplied...in this case the amount of money as savings) increases and the demand for it (consumption and eventually investment) decreases, the laws of supply and demand will dictate that rates will fall--more supply of a good chasing less demand for it generally equals a lower price for the given good....the "price" for money is the interest rate charged to borrow it. As rates fall, more people/companies will choose to save less (because it is less rewarding as they earn less interest for doing so); conversely, borrowing to invest/consume will become more attractive as rates fall and thus it becomes less expensive to borrow. The actual interest rate at which desired savings is equal to the amount of desired borrowing for investment or consumption will vary over time but the situation is usually that it reaches an equilibrium at some given rate above zero.

The problem starts when you have something like a "Minsky moment" (and subsequent deleveraging shock) when everyone as a whole (i.e. at a macroeconomic level) on average decides that they need to save more and consume less. In such a situation, rates can fall even to zero percent and the amount of money people/companies desire to save (i.e. not use for present consumption or investment) may still be greater than the given demand for it (because almost everyone is trying to become net savers and proportionately fewer want to borrow to invest or consume unless absolutely necessary). The usual response of the market (and/or the Fed) is to lower rates so that borrowing to invest/consume becomes more attractive and sitting on money becomes less attractive.....but the fact is, rates cannot go below zero for any real length of time because no one would lend money at, say -3% or -8% because they can get a guaranteed 0% just by sitting in physical cash; why lose money lending it out when you can just put it in the sock drawer and earn nothing but lose nothing either? That is what the "zero lower bound" phenomenon is. Deflation can in many cases only make it worse as sitting on cash earning a nominal 0% during a deflation means that one is actually earning a positive real return even at 0% nominal so the incentive to consume/invest is lessened even further (after all, in such a case any investments/consumption you choose to defer to the future will be even cheaper as prices fall) and the incentive to save is increased when the economy is already awash with excess savings that can't even find a productive home because even at 0% not enough people/companies want to borrow for investment or consumption.

[AgAuMoney]

my question was that given no Fed and little or no government intervention (i.e. Kshartle's idealized scenario) what would happen when we reached the zero lower bound and the amount the various ecomonic actors in the economy desired to save (even earning 0%) was greater than the amount other economic actors wished to borrow for productive uses or for consumption and how would a 100% pure free market solve it without resorting to vaporizing a percentage of someone's paper cash.

Oh.  Well, as I understand Kshartle's scenario, with no Fed and little or no gov't intervention, first I don't think reaching 0% on lending would be possible.  Would you lend and assume the risk of not being paid back for 0% potential return?  (note prosper and other lending experiments over the past 10-15 years).  Second, I don't believe there would be paper cash in that scenario without said paper representing a fixed amount of something other than gov't goodwill.  In which case saving can be equivalent to putting it in a jar, which would be infinitely preferable to taking the risk of return of capital for no potential return.  Barring a jar as being unsafe, interest rates on savings could conceivably go negative as banks would charge for providing safe storage.

Having said that, I wouldn't put it beyond our government to try something like this if it got desperate enough (although they might get some squawk from the courts...even under the legalized thievery allowed by the Kelo decision, "takings" have to be compensated.

I would like to see a good lawyer arguing for the gov't.  I think any opponent could be obliterated and made to look quite stupid assuming the court would even agree to hear the case.    One approach, the government thru its agents and accessories has been authorized by law and supreme court decision and long practice to create mild inflation for many decades.  Doing 10% overnight is not substantially different.  Alternative approach, it is a tax, specifically a tariff on specific monetary assets known as Federal Reserve Notes.

[D1984]

Oh.  Well, as I understand Kshartle's scenario, with no Fed and little or no gov't intervention, first I don't think reaching 0% on lending would be possible.  Would you lend and assume the risk of not being paid back for 0% potential return?  (note prosper and other lending experiments over the past 10-15 years).  Second, I don't believe there would be paper cash in that scenario without said paper representing a fixed amount of something other than gov't goodwill.  In which case saving can be equivalent to putting it in a jar, which would be infinitely preferable to taking the risk of return of capital for no potential return.  Barring a jar as being unsafe, interest rates on savings could conceivably go negative as banks would charge for providing safe storage.

You are assuming that in an environment with no physical paper money that a person would have a CHOICE of not lending it out for zero or negative potnetial returns. Money has to reside somewhere. They could put in in equities, bonds, foreign currency, gold, etc but if they thought those were too risky (and keep in mind that gold responds well to negative real rates, not negative nominal ones....if deflation were, say, -6% but interest rates were around -3 or -4% then gold might not do so well because real rates would still be slightly positive) or too volatile then what could they do? They'd either have to spend it on consumption or invest it in a business themselves, lend it to someone directly (and thus get whatever interest the market offered) or put it in a bank as deposits (and the bank would have to lend it out at the prevailing-potentially nominally negative--rate which would then be passed on to the depositor). Supply and demand could--given the right amount of desired savings vs desired borrowing/investment--lead to where the only way anyone was willing to borrow money would be to pay negative rates on it.

Do I think real nominal rates could ever be negative? In a system with no physical currency, where demand was depressed enough, deflation was high enough, and there was a huge glut of desired savings vs desired investment? Quite possible, although I don't think it would necessarily persist for very long as the economy would eventually recover, demand would pick back up, deflation would grind back up to stable prices neither rising nor falling, etc.

The whole belief that "rates can't ever go negative and even if they did I sure as heck wouldn't accept a negative return on my money" is a mental artifact of paper currency (or more succintly, is true so long as paper currency exists) because no one really thinks about what return they would have to accept if they didn't have the ability to hold folding money at a 0% nominal rate.

[MachineGhost]

This business about the fed and the 1940s is amazing btw... I had no idea.  Why wasn't Krugman shouting this from the rooftops earlier, or someone at pragcap/mr?

Back when clive was on the board and I was still somewhat new, I believe we identified that period as the sore spot for a pre-fiat money PP without having any real reasoning as to why.

[China Bull]

k shartle, i think your assessment is correct or has a high degree of probability. We are living in unchartered waters right now, economically, geopolitically. We are not witnessing Keynesian economics - i think he is turning in his grave when people now are pasting his name on the current economic paradigm most of the world's economies are supposedly practicing. What we have is a bunch of group think to the max when it comes to the "leading" govt. economic policies that are construed from our ivy league economic departments (98% of them are self described Keynesians) and who end up running the Fed , Treasury and other economic agencies (after or before they run the big banks). Nixon was wrong when he said " we are all Keynesian now" . It should be "We are all communist now" . Sorry to sound cataclysmic, but the best thing we can hope for is a complete collapse of this system we are in and start over again. It's probably going to cause some unbelievable suffering for not just Americans but the whole world. The PP together with a thoughtful understanding of Austrian economics to predict what is going to happen and build our VP around that is probably the best we can hope for.

[doodle]

k shartle, i think your assessment is correct or has a high degree of probability. We are living in unchartered waters right now, economically, geopolitically. We are not witnessing Keynesian economics - i think he is turning in his grave when people now are pasting his name on the current economic paradigm most of the world's economies are supposedly practicing. What we have is a bunch of group think to the max when it comes to the "leading" govt. economic policies that are construed from our ivy league economic departments (98% of them are self described Keynesians) and who end up running the Fed , Treasury and other economic agencies (after or before they run the big banks). Nixon was wrong when he said " we are all Keynesian now" . It should be "We are all communist now" . Sorry to sound cataclysmic, but the best thing we can hope for is a complete collapse of this system we are in and start over again. It's probably going to cause some unbelievable suffering for not just Americans but the whole world. The PP together with a thoughtful understanding of Austrian economics to predict what is going to happen and build our VP around that is probably the best we can hope for.

One could just as easily paint a bright and rosy picture of the future. I was in a similar dark hole regarding the outcome of our present situation. Now, Im thinking worse case scenario is a Japanese like flatline. Hardly the end of the world if you ask me.

If I worry about anything it is some trigger happy hawks starting world war three or an outbreak of some massive pandemic virus. Short of that, I think the Fabers, Rogers, and Schiffs of the world just sound like a bunch of perpetual chicken littles.

[MachineGhost]

If I worry about anything it is some trigger happy hawks starting world war three or an outbreak of some massive pandemic virus. Short of that, I think the Fabers, Rogers, and Schiffs of the world just sound like a bunch of perpetual chicken littles.

+1.  But what if they're right?   That's all you need to consider to immobolize yourself.

[atrchi]

But interest rates can only fall to zero so long as there is such a thing as physical money (when I say "physical money" I'm not even talking about gold...even physical paper money will do the trick) because no one will lend money out at a negative nominal rate when they can just sit in paper cash and earn 0%. What is supposed to happen when desired savings at any one time are greater than desired investment and you are still at the zero lower bound?

Please restate this. I think there is a real question dying to get out but it's cloaked in nonsense that I can't understand. I might be too dumb.

I think he meant: What is supposed to happen when desired savings at any one time are greater than desired borrowing and you are already at the zero lower bound?

And I think the answer is: Savers end up paying other people to "safeguard" their savings. What is meant by "safeguard" could range from keeping it in a protected vault (probably what the first ancient banks did), to loaning it out to other people 20 times over (i.e. what modern banks do).

Am I missing something?

[MachineGhost]

Government bonds have underperformed for very long periods in the past. “The 1940s ushered in an era of negative real bond returns lasting over 40 years where, despite a generally positively sloped yield curve, bond investors took such large capital losses that they wound up losing to cash,”? says Mr Inker.

Crikey!  How is what the Fed doing now any different?

[doodle]

How can you get a return on your money unless either the money supply is increasing or you have deflation?

Is there another way to get a return...doesnt seem possible to me.

[Pointedstick]

How can you get a return on your money unless either the money supply is increasing or you have deflation?

Is there another way to get a return...doesnt seem possible to me.

We're talking micro here, not macro. On a micro (individual) level, there are a zillion ways to get a return, even without requiring deflation or an expanding money supply--running a profitable business, for example.

[doodle]

How can you get a return on your money unless either the money supply is increasing or you have deflation?

Is there another way to get a return...doesnt seem possible to me.

We're talking micro here, not macro. On a micro (individual) level, there are a zillion ways to get a return, even without requiring deflation or an expanding money supply--running a profitable business, for example.

Yes, but if you remove either deflation or increasing money supply you are talking a zero sum game then.

If you have positive real interest rates you must have an expanding money supply. Is there another way to account for interest? When the folks on the right claim the government should stop printing money and interest rates should rise so that savers are rewarded, the only other option is that the private sector needs to take on more debt to increase the money supply. Where else does interest come from?

[Pointedstick]

Yes, but if you remove either deflation or increasing money supply you are talking a zero sum game then.

If you have positive real interest rates you must have an expanding money supply. Is there another way to account for interest? When the folks on the right claim the government should stop printing money and interest rates should rise so that savers are rewarded, the only other option is that the private sector needs to take on more debt to increase the money supply. Where else does interest come from?

Okay, so you want to talk macro, then?

Yes, an increasing money supply is necessary to prevent deflation and make real returns for everyone, or even if it's to just keep up with GDP growth and population growth. I think we both know that the deficit hawks who demand a balanced budget all the time don't have a firm grasp of how the monetary system actually works.

But I don't think this is a particularly right-wing position. Our current president and most of the Democrats seem equally unaware of these kinds of details. The truth is that most politicians pay lip-service to deficit hawkery but they all support the big spending policies especially when their states or districts stand to benefit. Even Ron Paul didn't reject the pork when they were handing it out. None of the numbers add up when people talk about balancing the budget. It's pure political theatre.

[doodle]

Yes, but if you remove either deflation or increasing money supply you are talking a zero sum game then.

If you have positive real interest rates you must have an expanding money supply. Is there another way to account for interest? When the folks on the right claim the government should stop printing money and interest rates should rise so that savers are rewarded, the only other option is that the private sector needs to take on more debt to increase the money supply. Where else does interest come from?

Okay, so you want to talk macro, then?

Yes, an increasing money supply is necessary to prevent deflation and make real returns for everyone, or even if it's to just keep up with GDP growth and population growth. I think we both know that the deficit hawks who demand a balanced budget all the time don't have a firm grasp of how the monetary system actually works.

But I don't think this is a particularly right-wing position. Our current president and most of the Democrats seem equally unaware of these kinds of details. The truth is that most politicians pay lip-service to deficit hawkery but they all support the big spending policies especially when their states or districts stand to benefit. Even Ron Paul didn't reject the pork when they were handing it out. None of the numbers add up when people talk about balancing the budget. It's pure political theatre.

A lot of people in this discussion also don't seem to understand. It seems pretty simple though.... If you want to have a return on your money you either have an increasing money supply (through government printing or private lending) or you have deflation.

Being that the private sector is deleveraging (which is already contracting the money supply) and deflation seems to have a lot of negative consequences exactly what other option exists than the present one?

EDIT:

And by the way, what is the problem with big spending policies on the part of government if the economy can support it? If the government spending leads to no inflation, higher employment, and you get some beneficial service (better parks, roads, more research etc.) what exactly is the issue as long as the government steps back when the private sector ramps up again.

Drawing arbitrary lines in the sand regarding government expenditures is absurd because it is entirely predicated on what the economy is capable of. It isnt a convincing argument to say that if the government stops spending right now, the private sector will pick up the slack. How does that happen when private consumers are deleveraging?

[MachineGhost]

And by the way, what is the problem with big spending policies on the part of government if the economy can support it? If the government spending leads to no inflation, higher employment, and you get some beneficial service (better parks, roads, more research etc.) what exactly is the issue as long as the government steps back when the private sector ramps up again.

Drawing arbitrary lines in the sand regarding government expenditures is absurd because it is entirely predicated on what the economy is capable of. It isnt a convincing argument to say that if the government stops spending right now, the private sector will pick up the slack. How does that happen when private consumers are deleveraging?

I really don't believe your claim that you were a libertarian in your youth.  You ask such ignorant questions that any economist, conservative, libertarian, Austrian, Monetarist or anarchist would know the answers too without a second thought. 

Are you just regurgitating your stream of consciousness onto this forum just for the attention?  Serious question.

[Libertarian666]

I thought it was obvious that doodle's comments cannot be taken seriously. As to why, I go with "troll", but I guess "very silly person" is a possible explanation too.

[doodle]

Sorry that I dont "toe" the libertarian platform.....or is that an oxymoron?

Regarding my youth, I bought into all the childish libertarian utopian fantasies until I grew up and saw the world as something much too complex to fit within a certain narrow dogma.

[Pointedstick]

[doodle]

Slotine,

Regarding the following:

"Furthermore, you should remind yourself that private and government spending only cancels each other out in the special case of a constant trade imbalance.  That never occurs in practice so what oscillatory behavior did you just start?"

Are you saying that we have avoided inflation by simply absorbing the productivity of cheap foreign workers? If thats what you mean, I agree. If we had to rely on pure American made products our government would have to be smaller in order not to compete with the tighter conditions in terms of available labor and resources. But that isnt the case, so why should we dial back when we have e opportunity to run a trade imbalance in order to avoid inflation? Warren Mosler thinks that the fact that other countries will run a trade imbalance with us is a great deal.

[doodle]

And by the way, what is the problem with big spending policies on the part of government if the economy can support it? If the government spending leads to no inflation, higher employment, and you get some beneficial service (better parks, roads, more research etc.) what exactly is the issue as long as the government steps back when the private sector ramps up again.

Drawing arbitrary lines in the sand regarding government expenditures is absurd because it is entirely predicated on what the economy is capable of. It isnt a convincing argument to say that if the government stops spending right now, the private sector will pick up the slack. How does that happen when private consumers are deleveraging?

I really don't believe your claim that you were a libertarian in your youth.  You ask such ignorant questions that any economist, conservative, libertarian, Austrian, Monetarist or anarchist would know the answers too without a second thought. 

Except that all of the "answers" provided by the respective parties mentioned here would contradict one another. 

[moda0306]

And by the way, what is the problem with big spending policies on the part of government if the economy can support it? If the government spending leads to no inflation, higher employment, and you get some beneficial service (better parks, roads, more research etc.) what exactly is the issue as long as the government steps back when the private sector ramps up again.

Drawing arbitrary lines in the sand regarding government expenditures is absurd because it is entirely predicated on what the economy is capable of. It isnt a convincing argument to say that if the government stops spending right now, the private sector will pick up the slack. How does that happen when private consumers are deleveraging?

I really don't believe your claim that you were a libertarian in your youth.  You ask such ignorant questions that any economist, conservative, libertarian, Austrian, Monetarist or anarchist would know the answers too without a second thought. 

Are you just regurgitating your stream of consciousness onto this forum just for the attention?  Serious question.

His approach to topics may be a bit disorganized at times, but what questions are so ignorant?  I had a streak where I had very libertarian leanings.  I felt "individual sovereignty" was the only logically consistent way to think about anything.  Then I realized that we're all going to have to find a way to share this island we're all stuck on together, and some serious questions have to be asked about how "free" we can actually be.

Libertarianism isn't logically/morally consistent (wants government to do some things, but not others, and then accuses everyone else of being "statist" trying to "enslave" them).  Full blown anarchy is logically/morally consistent, but isn't reasonably achievable nor is it likely to result in anything but a power vacuum where some other brute force comes in to control resources.

Some people come to how they view the world in a very loopy process, and these people probably have an even more loopy way of trying to tie their opinions together in discussion.  I'm probably one of them.  I, for one, am glad there's someone else here not just willing but anxious to poke holes in libertarianism.  Could we do it in more organized ways?  Most likely.  But I've met a lot of hair-brained libertarians that can't articulate their way out of a wet paper bag, though I don't accusing them of being deliberately obtuse (well I try not to).  Doodle creates certain walls around his thinking that are hard to get around due to how he thinks about things (I can't tell you how frustrating it was debating him over whether we're about to hit a fiscal meltdown), but I don't think he's trying to be trollish any more than people who can't see the inherant flaws of trying to achieve perfect liberty when we all share an island with limited resources are trying to be trolls when they constantly call anyone who disagrees with them a "statist" or somehow trying to control people in evil ways tantamount to slavery while they sit on a throne of moral purity as they just own "their property" and leave others alone.

As someone who's wanted to shake some sense into doodle in a discussion or two, I'm glad he's here.

[MachineGhost]

As someone who's wanted to shake some sense into doodle in a discussion or two, I'm glad he's here.

He asks passive-aggressive questions in a center-right forum for which the participants already know the answers, but doodle feigns not to know, despite once claiming to be a libertarian and even being a libertarian isn't a prerequisite to knowing the answers if one doens't mind being a hypocrite.  I've had enoguh.  He is a troll.