Tapering called off

[Pointedstick]

How can you guys possibly think the bank having bonds on it's balance sheet is the same as cash?  The only thing it can buy with it's bonds is cash. (correct me if that's wrong please)

No, they're not the same. But they're both valued at roughly equal levels on the balance sheet. That's all we're trying to say.

Let's imagine you woke up one morning and discovered that the money in your emergency fund had been swapped for 0.1% interest T-bills. You will probably feel pissed off. But will you feel poorer or richer? I don't think so; The T-bills are worth approximately what your cash was worth, and if you don't want to keep them, you can always sell them and receive cash right back, as you pointed out.

These bonds are not literally identical to cash, it's true. But they can easily be sold for cash and have about the same value on your personal balance sheet as cash with the same face value. Your total net worth has not really increased or decreased.

That you can't buy groceries with bonds does not detract from their status as something on the "asset" side of your balance sheet--same as stocks and gold.

[Kshartle]

How does Gumby have more money than had before?  Before, he had an IOU from MDRAF.  Now he has cash from you equal to the value of the IOU.  But, because you pushed the interest rate down, he has less money than he would have prior to your pushing the interest rate.

And MDRAF had the $2000 from Gumby prior to your getting involved.  How did your involvement change anything (besides lowering MDRAF's interest payments on future IOUs that he issues to Gumby by $1 per month)?

And, yes, you have that extra $1 per month in interest payment now.  Big freaking deal.  You can't actually buy anything like diapers or food with that money.

MDRAF has $2000 more than when we started. Gumby might have slightly more than when he started if I pay slightly more for the IOU than he did and I am receiving a tiny amount of interest that I didn't earn.

As I said, your involvement did not change anything very much at all.  Prior to your involvement, Gumby lent MDRAF $2000.  MDRAF was spending that money.  You didn't have anything to do with that.

No one has actually earned anything or produed anything and yet there is more money. Is that not obvious? Let's just stick with the example here before moving on and understand what has actually happened.

Yes, it is obvious that government deficit spending creates net financial assets.  No one disagrees with this.  But your buying the IOU from Gumby didn't do much at all.

No one has produced anything?  The diaper manufacturer certainly did.  As did the formula manufacturer.

Come on man. There are more dollars and not more stuff. The diapers and formula are not part of the transactions being described, they are there to demonstrate MDRAFs motivation for borrowing. If you can't admit this it appears to me you are just being argumentative.

[Kshartle]

Guys it's cool really. We can't discuss this stuff here. We should avoid the topic of QE and it's effect on the economy.

We can't?  Why not? I enjoy talking about it.  Others seem to as well. 

But if you don't want to discuss this, that's totally cool with me.

Sorry guys, that was frustration getting the better of me. I should have WE can't successfully discuss this stuff because we have extremely fundamental disagreements on basics and we always return to those basics.

The topics can be discussed best I think only by people who agree on the these absolute basic concepts. Obviously we both think our understanding is correct and that's a sticking point.

Sorry again, just frustrated.

[Kshartle]

MDRAF has $2000 more than when we started. Gumby might have slightly more than when he started if I pay slightly more for the IOU than he did and I am receiving a tiny amount of interest that I didn't earn.

As I said, your involvement did not change anything very much at all.  Prior to your involvement, Gumby lent MDRAF $2000.  MDRAF was spending that money.  You didn't have anything to do with that.
[/quote][/quote]

You didn't address this part, which I view as analgous to QE.  Do you have any comment?

[/quote]

I've addressed it very clearly. I believe you are ignoring it deliberatly. You are ignoring anything past Gumby lending him the money. You are ignoring the entire point of the thread which is related to QE. You are ignoring the actual QE.

[Gumby]

My understanding of Primary Dealer (and Fed) reserves is that reserves don't enter into the economy to actually buy anything, but instead, simply provide lubrication and buffer for the payment system between banks.  So when the Fed buys a bond from a Primary Dealer, the "moneyness" (to use one of Cullen Roche's terms) doesn't even change that much, because reserves are never spent into the private sector.

Correct. The reserves are basically just used for interbank transfer and interbank overnight loans. There are a few other things that reserves are used for, but you are correct that they never leave the reserve accounts at the Fed.

For non-banks (i.e. account holders at Primary Dealers), my understanding is that the proceeds from a sale of a T-bond are not reserves, but are more like money in a checking acount.  That is, they have a higher degree of moneyness and therefore can be "spent" whereas T-bonds cannot.

However, since the account holder has no more financial assets than he had before, he is not going to spend.

Do you agree with this?

When you say, 'an account holder at a primary dealer,' are you talking about an individual, selling your own T-bond to someone else on the secondary market? If so, then, it is no different than moving money from savings into checking (a higher degree of moneyness). However, since an individual cannot sell his T-Bond to the government — and only sell it with the private sector — the degree of moneyness in the private sector doesn't change on a Macro level.

If anything, people wind up with less savings in their bank accounts with QE, since the private sector winds up with less interest income.

Kind of funny, isn't it?  So many people think QE adds money to the private sector, but, in fact, it removes income!

Exactly.

[Gumby]

How can you guys possibly think the bank having bonds on it's balance sheet is the same as cash?  The only thing it can buy with it's bonds is cash. (correct me if that's wrong please)

Kshartle, I don't know how else to say this, but the overwhelming majority of our economy's purchasing power is not denominated in cash. It just isn't.

Another measure of money, M0, is also used; unlike the other measures, it does not represent actual purchasing power by firms and households in the economy. M0 is base money, or the amount of money actually issued by the central bank of a country.

Source: http://en.wikipedia.org/wiki/Money

Does that make sense to you, Kshartle? M0 does not represent our purchasing power. It is nothing more than what the Fed uses for interbank transfers at the end of the business day, to settle up the change in deposits between banks. That's it!

If you increase the amount of M0 for interbank transfers, and you take away an equal amount of purchasing power from the private sector, the total purchasing power in the private sector DOES NOT CHANGE.

What QE is, in effect, is an interest free loan to the government.

You are oversimplifying it. First of all, a fiat government is never rich or poor, so it really is just numbers in a computer from the government's perspective (i.e. it's a little silly to imagine a fiat government giving itself a free loan).

But, you're forgetting that the Fed does not purchase anything directly from the Treasury. The Primary Dealers buy the bonds at auction — with its own reserves from previous government spending. That's what legally enables the government spending — but it's a bit of an illusion since the reserves created by previous government spending is what enables the Primary Dealers to buy those bonds at auction. The Fed purchasing the bonds after the fact simply lets the government off the hook from having to make the interest payments that it has no trouble making. And truthfully, the banks would honestly rather have the bonds, since the bonds would give them more interest income on their reserves than IOR.

Gumby loans him the other 2k per month needed to get by. He receives a note that promises repayment with interest...Every month I print 2k or slightly more and buy the note from Gumby...Gumby has as much money or possibly slightly more

I am no richer after the transaction because the extra money you gave me usually doesn't cover the lost interest income on that savings (plus I believe the tax rate on the sale is more than the tax rate on interest, in reality).

MDRAF has 2k more which will be spent and bid up prices.

No, no. QE doesn't enable the government to spend that money. The bonds are purchased by the Fed from the Primary Dealers on the Secondary Market. Sales on the Secondary Market do not have any effect on the Treasury's ability to spend. You will miss this point if you try to oversimplify it.

And finally, the Fed could not monetize a bond if the bond did not exist in the first place. It's the net deposit of the bond in the private sector that enables the government to create its own currency.

[Kshartle]

Your last post messed up the attributions.  I'll fix them below.

MDRAF has $2000 more than when we started. Gumby might have slightly more than when he started if I pay slightly more for the IOU than he did and I am receiving a tiny amount of interest that I didn't earn.

As I said, your involvement did not change anything very much at all.  Prior to your involvement, Gumby lent MDRAF $2000.  MDRAF was spending that money.  You didn't have anything to do with that.

You didn't address this part, which I view as analgous to QE.  Do you have any comment?

I've addressed it very clearly. I believe you are ignoring it deliberatly. You are ignoring anything past Gumby lending him the money. You are ignoring the entire point of the thread which is related to QE. You are ignoring the actual QE.

I guess I don't quite understand then.  Because in my mind I've addressed it.  My quick summary:

Part 1.
Gumby (private sector) lends MDRAF (govt) $2000 at some interest rate.  MDRAF spends this money into the economy, buying diapers and formula.  Private sector people receive that money that they would not have received had MDRAF not bought the diapers and formula.  Yes, there is more money circulating around than had Gumby not loaned MDRAF the money.

Part 2. You (the Fed) buys MDRAF's IOU from Gumby for $2001 (it is worth a little more now because you pushed interest rates down; OTOH, he would have preferred those higher interest payments over time, so he actually is worse off).  Gumby is now looking for some other place for his savings.  He isn't going to spend this (if he was planning on spending it, he would not have loaned it to MDRAF in the first place).

To reiterate, Part 1 adds money to the economy.  No doubt.

But part 2 doesn't.

As Gumby (the real one) implies, I am leaving other entities out of the example.  But I think even the simplified example shows that QE is simply an asset swap, and does not affect purchasing power.  I welcome comments.

Money in the bank is still in the economy. It exists whether it's in the bank or in the hands of diaper makers.
More money exists after I print it. Not before.

Why did you sell me the bonds if you preferred not to?

Let's keep this simple and not bring the multiplier effect of fractional reserve banking or anything in.

Regarless I never said Gumby was a bank. Let's keep it really basic.

[Kshartle]

As Gumby (the real one) implies, I am leaving other entities out of the example.  But I think even the simplified example shows that QE is simply an asset swap, and does not affect purchasing power.  I welcome comments.

After the first transaction takes place, does MDRAF have more purchasing power? What about Gumby?

After the second transaction takes place, does MDRAF have more purchasing power? What about Gumby? What about me?

Comparing the start to the end, does MDRAF have more PP? What about Gumby? What about me? Did we produce anything to earn that PP? What did we trade for it?

[Kshartle]

As Gumby (the real one) implies, I am leaving other entities out of the example.  But I think even the simplified example shows that QE is simply an asset swap, and does not affect purchasing power.  I welcome comments.

After the first transaction takes place, does MDRAF have more purchasing power? What about Gumby?

MDRAF: yes. 
Gumby: No.  He has the same as he had before.


So someone borrowing from someone else creates purchasing power? You admit MDRAF can buy more than before and now Gumby can buy the same amount as before? They didn't produce anything of value and trade it and yet they can now buy more than before. Does that make any sense to anyone?

[Gumby]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power. If MDraf is the government, he has no constraints on his purchasing power to being with (i.e. he can always issue more debt). MDraf gains purchasing power by issuing the bonds out of thin air in the first place.

Think about it, the $2K money I had to lend Mdraf originally came from Mdraf creating debt in the first place!

[Kshartle]

As Gumby (the real one) implies, I am leaving other entities out of the example.  But I think even the simplified example shows that QE is simply an asset swap, and does not affect purchasing power.  I welcome comments.

After the first transaction takes place, does MDRAF have more purchasing power? What about Gumby?

MDRAF: yes. 
Gumby: No.  He has the same as he had before.

After the second transaction takes place, does MDRAF have more purchasing power? What about Gumby? What about me?

MDRAF: No.  He has the same as he had before.
Gumby: No.  He has the same as he had before.
You: immaterial.  You can only buy IOUs.

After the second transaction Gumby can now buy something with the dollars. What could he buy previously with the IOU? 

[Kshartle]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power. If MDraf is the government, he has no constraints on his purchasing power to being with (i.e. he can always issue more debt). MDraf gains purchasing power by issuing the bonds out of thin air in the first place.

Think about it, the $2K money I had to lend Mdraf originally came from Mdraf creating debt in the first place!

You didn't have the 2k until he borrowed it from you?

[Gumby]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power. If MDraf is the government, he has no constraints on his purchasing power to being with (i.e. he can always issue more debt). MDraf gains purchasing power by issuing the bonds out of thin air in the first place.

Think about it, the $2K money I had to lend Mdraf originally came from Mdraf creating debt in the first place!

You didn't have the 2k until he borrowed it from you?

No... I didn't have the $2K until he issued the IOU in the first place so that you could "monetize" it. (Where else did the $2K come from?)

After the second transaction Gumby can now buy something with the dollars. What could he buy previously with the IOU?

Sorry, but this is such a convoluted example that is so far removed from reality. In the real world, I can buy whatever the heck I want to with a government IOU because the IOU market is the most asset market in the world.

When you tap TRANSFER TO CHECKING on your ATM, you are literally swapping an IOU for cash so that you can buy something.

If you keep trying to shoehorn this into an island ecosystem with three or four people on it, you'll never see that.

[Kshartle]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power.

You don't see how he has 2k to spend where he didn't until he borrowed it from you?

I don't believe you don't see that.

[Kshartle]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power. If MDraf is the government, he has no constraints on his purchasing power to being with (i.e. he can always issue more debt). MDraf gains purchasing power by issuing the bonds out of thin air in the first place.

Think about it, the $2K money I had to lend Mdraf originally came from Mdraf creating debt in the first place!

You didn't have the 2k until he borrowed it from you?

No... I didn't have the $2K until he issued the IOU in the first place so that you could "monetize" it. (Where else did the $2K come from?)

After the second transaction Gumby can now buy something with the dollars. What could he buy previously with the IOU?

Sorry, but this is such a convoluted example that is so far removed from reality. In the real world, I can buy whatever the heck I want to with a government IOU because the IOU market is the most asset market in the world.

When you tap TRANSFER TO CHECKING on your ATM, you are literally swapping an IOU for cash so that you can buy something.

If you keep trying to shoehorn this into an island ecosystem with three or four people on it, you'll never see that.

Someone else now has the IOU and you have their dollars. What can they buy with their IOU? Can anyone buy anything other than dollars with their IOU?

You said in another thread "purchasing power was created because you went to work, worked hard and provided goods and services."

Now it sounds like purchasing power is created when the government borrows money. Which one is it?

[Gumby]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power.

You don't see how he has 2k to spend where he didn't until he borrowed it from you?

I don't believe you don't see that.

Tell me, where did I get the 2k to lend to him in the first place if I don't have the ability to create currency.

[Mdraf]

Good morning guys and gals...

Further imagine MDRAF is married to a drunk who will not help him. He has 19 kids to feed. It costs him 4k per month for diapers and formula. He only make 2k per month working OT at a gas station. (Sorry MDRAF)

Yeah but she's HOT. Eat your heart out !

Too late for me to pick up the thread, but I'm sure they'll be plenty more.

[Kshartle]

I would disagree with Mdraf gaining purchasing power. I don't see how MDraf increased his purchasing power.

You don't see how he has 2k to spend where he didn't until he borrowed it from you?

I don't believe you don't see that.

Tell me, where did I get the 2k to lend to him in the first place if I don't have the ability to create currency.

You might have worked and traded for it, stolen it, gotten it from charity. Many different ways. We all have money and I suspect we don't all have printing presses.

[Kshartle]

Good morning guys and gals...

Further imagine MDRAF is married to a drunk who will not help him. He has 19 kids to feed. It costs him 4k per month for diapers and formula. He only make 2k per month working OT at a gas station. (Sorry MDRAF)

Yeah but she's HOT. Eat your heart out !

Too late for me to pick up the thread, but I'm sure they'll be plenty more.

I left out her hotness because I didn't want to provide another tangent to drive it off topic when positions become vulnerable.

[Gumby]

Someone else now has the IOU and you have their dollars. What can they buy with their IOU?

Whatever they want to so long as they can easily trade their IOU for dollars — which they can, because the Primary Dealers make sure of it.

Can anyone buy anything other than dollars with their IOU?

In today's world, you can buy whatever you want directly from a Treasury Money Market fund. The bank does all the work behind the scenes for you.

You said in another thread "purchasing power was created because you went to work, worked hard and provided goods and services."

Now it sounds like purchasing power is created when the government borrows money. Which one is it?

What I'm saying is that the government doesn't technically "borrow" money when it wants to spend. It makes net deposits of Treasury debt in the private sector and that enables the government to spend (we want to buy the debt with their government spending to get a return on bank reserves). The Fed simply monetizes the appropriate amount of debt into reserves to facilitate interbank transfers. Most of the time purchasing power is simply created by people working either for private-credit based salaries or government salaries. M0 base money does nothing except facilitate the transfer of those debt/credit-based assets and the government is never reserve constrained.

[Gumby]

You might have worked and traded for it, stolen it, gotten it from charity. Many different ways. We all have money and I suspect we don't all have printing presses.

No, I mean where did the $2K originally come from on this island you speak of? Who issued it?

[Mdraf]

Nobody addressed this part of my yesterday's post:

http://www.bloomberg.com/news/2013-09-1 ... risis.html

Namely why is the CBO all bent out of shape if deficits don't matter?

If I get a good explanation I'll write a nice letter to them explaining why the folks here think they are misguided.

[Gumby]

Nobody addressed this part of my yesterday's post:

http://www.bloomberg.com/news/2013-09-1 ... risis.html

Namely why is the CBO all bent out of shape if deficits don't matter?

If I get a good explanation I'll write a nice letter to them explaining why the folks here think they are misguided.

The CBO is basing their calculations using an obsolete gold standard model of reserve constraints — not as a fiat currency issuer. They believe that the government can run out of money, and we say that would be like a stadium running out of points at a football game and having to "borrow" points from football players.

[MediumTex]

It can't be repeated too often that no one is saying that the configuration of the current monetary system is a good thing.

But even as a thing that is not good, it has certain design characteristics that are worth understanding.

If someone wants to say that it's a stupid system, I'm sure that most of us would agree on that point.

IMHO, part of what makes it stupid is that many of the people who are making key decisions about economic, fiscal and monetary policy (especially most members of Congress) seem not to have a strong understanding at all of how the system actually works.

Imagine putting Fred Flintstone behind the wheel of a Chevy Corvair, and that's our current system.

[Mdraf]

From my perspective, we're discussing what the system actually is, and how it functions.  And that knowledge is valuable and interesting to me, even if it isn't to you.

This fanatical belief in the face of reality is known as The Zeal Of The Convert