Gyroscopic Investing

PS,

Great discussion fellas... at times we seem to stall on political/economic topics, but once we take a break, gather thoughts, come back, etc, our differences become more clear for it.  Despite constantly rehashing MMT I think we're slowly whittling away areas of agreement and confusion to reach a greater clarity on things monetary/fiscal.

Lone Wolf wrote:

Gumby wrote: As Bernanke explained (see above), when the Fed purchases anything, it's really just an asset swap. Every dollar added to the Fed's balance sheet is offset by the liability side of the balance sheet — which creates more bank reserves at the Fed. It's an asset swap. This is well known.

Sure.  This is the same thing that I mentioned above.  However, I do not consider a change to the Federal Reserve's balance sheet to be the same thing as a Federal budget deficit.  YMMV, but I think this point confuses a lot of people into thinking that more spending by Congress is required to increase the money supply (which is clearly not the case.)  If MMT is supposed to be a clarification tool, why do people come away believing this?

A Federal Reserve Note (i.e. Cash) and a Treasury Bond are both liabilities of the US government. When a QE or POMO transaction is finished, the liabilities stay exactly the same. No net new financial assets are added to the private sector. Reserves are swapped for bonds.

Understanding The Mechanics of a QE Transaction

“Cash”? is simply a very liquid liability of the U.S. government.   You can call it “cash”?, Federal Reserve notes, whatever.  But it is a liability of the U.S. government.  Just like a 13 week treasury bill.  What is the major distinction between “cash”? and bills?  Just the duration and amount of interest the two pay.  Think of one like a checking account and the other like a savings account.

This is a crucial point that I think a lot of us are having trouble wrapping our heads around. In school we are taught that “cash”? is its own unique asset class. But that’s not really true. “Cash”? as it sits in your bank account is really just a very very liquid government liability. What is the difference between your checking and savings account? Do you classify them both as “cash”?? Do you consider your savings accounts a slightly less liquid interest bearing form of the same thing a checking account is?

What is a treasury note account? It is a savings account with the government. So now you have to ask yourself why you think cash is so much different than a treasury note?  What is the difference between your ETrade cash earning 0.1% and that t note earning 0.2%? NOTHING except the interest rate and the duration.  You can’t use your 13 week bill to pay your taxes tomorrow, but that doesn’t mean it isn’t a slightly less liquid form of the exact same thing that we all refer to as “cash”?.  They are both govt liabilities and assets of yours.
Source: Understanding The Mechanics of a QE Transaction

I'm not aware of a way that the Fed is able to increase the balance sheet of the private sector. The transactions always net to zero since every dollar the Fed puts out is offset by an equal liability that they take in.

I have trouble wrapping my head around "cash" as a liability of the gov't, Gumby.  I know that's what it says on the fed balance sheet for purposes of accounting identity, but while I agree with what the article is saying (that QE is is just rearranging deck furniture), but explain to me in what context cash is a liability?

moda0306 wrote: I have trouble wrapping my head around "cash" as a liability of the gov't, Gumby.  I know that's what it says on the fed balance sheet for purposes of accounting identity, but while I agree with what the article is saying (that QE is is just rearranging deck furniture), but explain to me in what context cash is a liability?

From Wikipedia:

http://en.wikipedia.org/wiki/Federal_Reserve_Note

Federal Reserve Notes are authorized by Section 411 of Title 12 of the United States Code and are issued to the Federal Reserve Banks at the discretion of the Board of Governors of the Federal Reserve System. The notes are then put into circulation by the Federal Reserve Banks. Once the notes are put into circulation, they become liabilities of the Federal Reserve Banks and obligations of the United States.
Source: http://en.wikipedia.org/wiki/Federal_Reserve_Note

Wikipedia's source is: Section 415 of Title 12 of the United States Code. Section 415 describes circulating Federal Reserve Notes as liabilities of the issuing Federal Reserve Bank.

Wiki refers to the note, a liability of the fed, as being backed by a treasury bond, an asset of the fed.

So now dollars are backed by bonds denominated in those dollars? 

The bonds, per MMT, can't be "sold" until the dollars are already issued (at least in today's economy, post Gold Standard), so this seems to make no sense... unless this is all simply just a "name game" and the liabilities and assets within the fed are just a myth.

moda0306 wrote: Wiki refers to the note, a liability of the fed, as being backed by a treasury bond, an asset of the fed.

So now dollars are backed by bonds denominated in those dollars?  

The bonds, per MMT, can't be "sold" until the dollars are already issued (at least in today's economy, post Gold Standard), so this seems to make no sense... unless this is all simply just a "name game" and the liabilities and assets within the fed are just a myth.

My understanding is that Congress mandated long ago that every dollar the US governments spends into existence must be offset by an issued US Treasury Bond. People think the government needs to "borrow" to spend. But, that's just how it used to work. The laws were never changed when the dollar went fiat. Now we "borrow" (i.e. issue bonds) for no reason other than to satisfy the law that Congress never changed.

In reality, the law of mandating the issuing bonds for every dollar spent allows the government to keep track of spending, accountability and influence interest rates.

Gumby,

So do you see a benefit to doing away with all this fed/treasury tomfoolery and fund government by printing, while using bonds as a monetary tool, not a fiscal necessity?

I tend to agree with MMT, but it sure makes our tax system seem particularly asinine if it's an accurate description to simply say that taxes, on top of inducing behaviors, simply destroys money.

moda0306 wrote: Gumby,

So do you see a benefit to doing away with all this fed/treasury tomfoolery and fund government by printing, while using bonds as a monetary tool, not a fiscal necessity?

I tend to agree with MMT, but it sure makes our tax system seem particularly asinine if it's an accurate description to simply say that taxes, on top of inducing behaviors, simply destroys money.

Well, Warren Buffet once said that every single line of the US Tax code was designed by a lobbyist somewhere. I think he's right. That's why taxes are so complex.

In my opinion, the Fed is impotent when it comes to improving the balance sheet of the public sector. It can swap assets and liabilities all day till the cows come home, and it can target interest rates effectively (which can be helpful), but no one has yet to convince me that the Fed can improve the balance sheet of the private sector.

The only way to improve the balance sheet of the private sector is to either have the government spend more money (i.e. a deficit, which creates more money then it takes in through taxes) or for the government to facilitate debt-forgiveness as stone described previously. It certainly doesn't happen through the Fed's Open Market Operations (since those are just asset swaps).

Gumby,

I totally agree.  I tend to dislike the discussion by Keynesians & Krugman now that says "The fed has lost its ability to generate a recovery, so we need to resort to fiscal policy."

To me, fiscal policy seems to be the one that actually moves mountains by affecting net-savings and private-sector profits.

The fact that deficits in the last decade haven't generated the full employment and solid private-sector savings & prosperity we'd hope for probably has a lot to do with our negative trade balance, which continues to this day.


Gumby,

How does debt-forgiveness improve the private sector balance sheets... isn't that just deleting an asset in one person's account and a liability in another?

moda0306 wrote:How does debt-forgiveness improve the private sector balance sheets... isn't that just deleting an asset in one person's account and a liability in another?

I think debt-forgiveness is really about speeding up the process of balance sheet repair. The government helps or takes the loss when needed, Read stone's post and the articles he links to.

Also read...

http://www.project-syndicate.org/commen ... h8/English

...where the author says:

What can be done? While measures adapted in the depths of the crisis – massive fiscal and monetary stimuli – were effective in placing a bottom under the free-fall, they have been ineffective in sparking meaningful recovery. That should hardly be surprising in an era of balance-sheet repair.

Instead, the US needs a menu of policies tailored to the needs and pressures bearing down on American consumers. Some possibilities: debt forgiveness to speed up the deleveraging process; creative saving policies that restore financial security to crisis-battered Americans; and, of course, jobs and the income they generate.

Gumby wrote: The only way to improve the balance sheet of the private sector is to either have the government spend more money (i.e. a deficit, which creates more money then it takes in through taxes) or for the government to facilitate debt-forgiveness as stone described previously. It certainly doesn't happen through the Fed's Open Market Operations (since those are just asset swaps).

I don't agree.  It is a swap of an asset for something which is printed out of thin air.

Take what you're saying to its logical conclusion.  Imagine that the Fed initiated Open Market Operations in which it bought every last hunk of gold on Earth.

Perhaps the Fed buys the entire stock market.

Do you believe that these new dollars would have no effect?  There'd be no "balance sheet repair" via rip-roaring, cataclysmic hyperinflation?

Obviously these would be confiscatory, ruinous things to do.  But my oh my would everyone's balance sheets be flush with dollars!

Lone Wolf wrote:

Gumby wrote: The only way to improve the balance sheet of the private sector is to either have the government spend more money (i.e. a deficit, which creates more money then it takes in through taxes) or for the government to facilitate debt-forgiveness as stone described previously. It certainly doesn't happen through the Fed's Open Market Operations (since those are just asset swaps).

I don't agree.  It is a swap of an asset for something which is printed out of thin air.

Take what you're saying to its logical conclusion.  Imagine that the Fed initiated Open Market Operations in which it bought every last hunk of gold on Earth.

Perhaps the Fed buys the entire stock market.

Do you believe that these new dollars would have no effect?  There'd be no "balance sheet repair" via rip-roaring, cataclysmic hyperinflation?

Obviously these would be confiscatory, ruinous things to do.  But my oh my would everyone's balance sheets be flush with dollars!

I still don't see your point. It's still a swap. Nobody is any richer or poorer when those ridiculous transactions are done. No net new financial assets are added to the private sector. If I give you dollars for your gold, or dollars for your stocks, are you any richer or less in debt? No.

The only thing that changed is that you are more liquid.

Gumby,

I am tentatively agreeing with LW here that if a dollar was printed out of thin air and spent on something "different enough" then it's expanding the money supply. 

Gumby, to take your description of "asset swap" to a different conclusion, if we operated in MMT world where we simply print to spend, and that printing is spent on things like bridges, cars, etc, isn't that just an asset swap?  Do we then say that nobody's financial position has changed because assets were merely swapped?

I am seeing a cash/ST-treasury asset swap as being the real "non-event," but if exchanging other types of assets for printed cash isn't changing anything, then nothing changes anything.

A treasury bond used to be a pile of dollars, but is now a different form of money with a term element to it.  Swapping one for the other has little significace.

A house was never money.  It was built with hands & resources and represents real wealth.  Printing dollars to buy them is the same as if a MMT government print-spent to buy homes.

At least that's how I see it.

moda0306 wrote: Gumby,

I am tentatively agreeing with LW here that if a dollar was printed out of thin air and spent on something "different enough" then it's expanding the money supply.  

Gumby, to take your description of "asset swap" to a different conclusion, if we operated in MMT world where we simply print to spend, and that printing is spent on things like bridges, cars, etc, isn't that just an asset swap?  Do we then say that nobody's financial position has changed because assets were merely swapped?

I am seeing a cash/ST-treasury asset swap as being the real "non-event," but if exchanging other types of assets for printed cash isn't changing anything, then nothing changes anything.

A treasury bond used to be a pile of dollars, but is now a different form of money with a term element to it.  Swapping one for the other has little significace.

A house was never money.  It was built with hands & resources and represents real wealth.  Printing dollars to buy them is the same as if a MMT government print-spent to buy homes.

At least that's how I see it.

If the government prints money to buy a home, are any net new financial assets are added to the private sector? No, because now the government owns your home now. You simply converted your home's net worth into dollars (i.e. government liabilities). You aren't any richer than you were before (since you don't have a home now). The private sector just lost a house, but gained the equivalent in dollars. Where do those dollars go? They get absorbed back into the Fed as extra reserves that were created to offset the liability. As Bernanke said, "What’s happening is that banks are holding more and more reserves with the Fed."

No net new financial assets in the private sector. No inflation because now there are more offsetting reserves being held at the Fed. The charts I posted clearly show that.

When the government creates a bridge, they add money to the private sector as they pay people with more government liabilities (i.e. they spend Federal Reserve Notes and issue corresponding Treasury bonds). That's what Sectoral Balances are all about.

Again, I will post the Fed data to prove my point. The Fed never creates money out of thin air without creating an equal entry on the liability side of its balance sheet:

[align=center]
Federal Reserve assets in billions of dollars. Data source: Federal Reserve Release H.4.1.[/align]

[align=center]
Federal Reserve liabilities in billions of dollars. Data source: Federal Reserve Release H.4.1.[/align]


So, if the government hands you a million dollars for your home, the Fed just increases the amount of reserves that banks hold at the Fed by a million dollars to offset the "printing." Yes, you are more liquid, but there aren't any more dollars floating around at shopping malls (since the reserves held at the Fed increased by the same amount to offset the Fed's liability). No new assets were created either (since the house already existed, and now the government owns it).

I still see no evidence that the Fed has the legal authority to create net new assets in the public sector. Every dollar they "print" is offset by an equal liability.

Gumby,

A house isn't a financial asset.  A bond is.  A dollar traded for a bond is trading two assets, both of which were printed out of thin air.  A dollar traded for a home is trading something real for money printed out of thin air.  Maybe it'll just sit in banks as reserves, but that's the choice of the borrowers/savers.  The fact that it doesn't make it into the real economy is their choice... supply & demand.

When the treasury sends out stimulus checks to everyone, and they deposit it in their accounts, it "just increases bank reserves" but they're free to spend it or save it.

Whether spending will be inflationary or not or whether they spend it or not doesn't mean that the money isn't savings in their account.

What I'm saying is, and this is what I thought MMT'ers argue, that the bonds the treasury issues are just as printed out of thin air as the money, and exchanged for said money, that they're not really accomplishing anything "real" by buying bonds.

If you can say the same thing about the fed buying houses with printed money, then all of MMT makes no sense, because MMT'ers argue that you're allowing savings & profits in the economy by print-spending in excess of shred-taxing.

I think you might be commiting the falacy of composition.  Yes, if the gov't purchases from me my home for $200k at FMV, then I'm no better or worse off than I was before.  Let's take it a step further.  What if the gov't did that for 10 million homeowners out there will be $2 Trillion more dollars in the economy with the same number of homes.  Lastly, lets assume all these people had their homes paid off.

People might choose to do nothing with the money and just keep it in savings/checking, and therefore it will show up as reserves, but this isn't an argument of whether we'll have inflation, it's an argument of whether they've "increased the money supply."  Whether the fed buys bonds or houses, they've traded one asset for another, but only in the case of bonds have they not really changed the substance of an individual or bank's balance sheet, not in amount but it qualitative aspects... since treasury bonds are another form of money printed out of thin air, just as greenbacks are.

Trading printed "assets" (backed by the gov't's ability to tax) for ANYTHING real (privately-created non monetary assets) is the very definition of inflating, printing, etc.  Done once, it isn't noticed, but it's the nature of doing this many times over, in mass, that we're talking about when we discuss the fed buying things.

Once again: If trading a printed dollar for real wealth is a non-event as far as generating private-sector savings in profits, then how does MMT hold water?  MMT builds its case that print-spending for goods & services is the only way to improve private-sector financial-asset balance sheets

I think this is 30% us disagreeing and 70% us agreeing but arguing past each other or just simply misunderstanding, but the whole crux of MMT is the idea that running deficits (aka, buying goods and services in excess of tax receipts) is the only way to create net financial assets, then saying that when a fed buys a house nothing happens seems inconsistent.

moda0306 wrote: A house was never money.  It was built with hands & resources and represents real wealth.  Printing dollars to buy them is the same as if a MMT government print-spent to buy homes.

This is a good example, even though the Fed isn't (yet!) buying houses up.

Gumby wrote: If the government prints money to buy a home, are any net new financial assets are added to the private sector? No, because now the government owns your home now. You simply converted your home's net worth into dollars (i.e. government liabilities). You aren't any richer than you were before (since you don't have a home now). The private sector just lost a house, but gained the equivalent in dollars.

The price for houses will not remain static while the Fed streams money off of the printing press to buy them up.

Gumby wrote: No net new financial assets in the private sector. No inflation because now there are more offsetting reserves being held at the Fed.

I'm astonished by this statement.  I must be misunderstanding you.  Have to be.

Do you mean to tell me that if the Fed embarked on a campaign whereby it printed money to buy every house in the United States, there would be no inflation?  The price for these houses would not change in any way?

If this is the case, it would be a simple matter for the government to buy up every resource on the planet.  Just keep the printing presses roaring and the entire planet happily accepts these dollars in exchange for every real good under the sun.

Quite the three-way squabble we have going on here...

LW, how we found ourselves agreeing with each regarding the operation of our currency is beyond me.  It was nice while it lasted.

BTW, aren't QE and "Open Market Operations" the exact same thing?

moda, "How does debt-forgiveness improve the private sector balance sheets... isn't that just deleting an asset in one person's account and a liability in another?"

Moda, that is the whole point. If each of us was equally a debtor and creditor then the debts would not create any problems. We would each get interest and pay interest and all would be affordable. BUT people only bother to take on debt because they are short of money. Some people are creditors and OTHER people are debtors. Debt is about unequal wealth. It is fine so long as people start life in debt and then end up paying it off and becoming a creditor. It screws everything up if instead some people are lifetime debtors and others are lifetime creditors. That is the bind that the global economy is in. Government deficits are one way to string things along by using dilution to erode the value of the debts.
We have debt deflation because potential customers for goods and services will only be able to avail themselves of those goods and services if they are not weighed down by a debt burden. One way to mitigate such debt deflation is to make the debts affordable by using government deficits to offset the deflation. The other way is to forgive the debt. Both ways act to reduce the value of the creditor's asset. In the one case it is by dilution. In the other case it is by straightforward annulment of the contract. If neither thing was done, default would be inevitable. Historically the debtor would then become the slave of the creditor or would violently overthrow the creditor. As Einstein said, the strongest force is compound interest.
To my mind using government deficits just leads to ever more severe distortions. To my mind it amounts to a failure to face up to reality and instead resort to an unsustainable short term expedient. Deficits lead to an inflationary current and as it goes on, a greater and greater proportion of the economy becomes diverted to harvesting that inflationary current instead of doing what is needed to look after us all (the process of "financialization").

moda0306 wrote: LW, how we found ourselves agreeing with each regarding the operation of our currency is beyond me.  It was nice while it lasted.

BTW, aren't QE and "Open Market Operations" the exact same thing?

Aww, must it end?    If we both agree that money can be created in other ways besides Federal budget deficits then we really are on the same page.  Sing it now: "Kum-ba-yaaa, mo-daaaa!  Kum-ba-yaaaa!"

I do agree that QE is a very similar thing (in the ways that matter), just with a different stated goal IMO.  With QE, they really are simply trying to increase the money supply without making much pretense that they care very much about any particular interest rate target.

Predicting the precise results of any given QE operation, however, is comfortably beyond my abilities. 

moda0306 wrote:A house isn't a financial asset.

The Fed has to list its assets on its balance sheets, so I guess you have to decide if it's an asset that can be listed on its balance sheet or not.

moda0306 wrote:Maybe it'll just sit in banks as reserves, but that's the choice of the borrowers/savers.  The fact that it doesn't make it into the real economy is their choice... supply & demand.

The Fed requires the reserve, so that's where the banks have to put the money. There is no "choice" as long as banks have money in them. If you think about it all money that isn't in the form of paper lives in a bank somewhere, so this is not difficult to do.

moda0306 wrote:What I'm saying is, and this is what I thought MMT'ers argue, that the bonds the treasury issues are just as printed out of thin air as the money, and exchanged for said money, that they're not really accomplishing anything "real" by buying bonds.

If you can say the same thing about the fed buying houses with printed money, then all of MMT makes no sense, because MMT'ers argue that you're allowing savings & profits in the economy by print-spending in excess of shred-taxing.

You seem to think that the Fed buying things and the government spending money are the same thing. They aren't. When the Fed buys something, the Fed owns it. When the government spends money, the public gets the money and the public owns the bonds. That's why they call it the Bureau of the Public Debt.

moda0306 wrote: I think you might be commiting the falacy of composition.  Yes, if the gov't purchases from me my home for $200k at FMV, then I'm no better or worse off than I was before.  Let's take it a step further.  What if the gov't did that for 10 million homeowners out there will be $2 Trillion more dollars in the economy with the same number of homes.

The homes would have big FED padlocks on them. They wouldn't be owned by the public anymore. It would be like someone shot a ray gun at the house and turned the house into a pile of money. No more house. No net new asset created.

moda0306 wrote:Lastly, lets assume all these people had their homes paid off.

People might choose to do nothing with the money and just keep it in savings/checking, and therefore it will show up as reserves, but this isn't an argument of whether we'll have inflation, it's an argument of whether they've "increased the money supply."

They've increased the number of available "dollars" yes. But, the Fed just increased their reserves the exact same amount. They require it (see the charts!). QE or Fed purchases doesn't necessarily make people spend their money. It just makes them more liquid.

moda0306 wrote:Trading printed "assets" (backed by the gov't's ability to tax) for ANYTHING real (privately-created non monetary assets) is the very definition of inflating, printing, etc.  Done once, it isn't noticed, but it's the nature of doing this many times over, in mass, that we're talking about when we discuss the fed buying things.

If the Fed bought everything in the entire country and gave us dollars for everything you see around you, the public sector wouldn't own anything, we'd just have the equivalent in dollars. The public's balance sheet wouldn't change. You seem to assume that everyone gets to keep what the Fed purchases. They don't.

moda0306 wrote:Once again: If trading a printed dollar for real wealth is a non-event as far as generating private-sector savings in profits, then how does MMT hold water?  MMT builds its case that print-spending for goods & services is the only way to improve private-sector financial-asset balance sheets

You seem to confuse government spending with government swapping of assets. If the government spends money (i.e. pays salaries) it doesn't get anything in return. But, if the Fed purchases something, it definitely takes something in return.

Show me where the Fed ever spends something and doesn't get something in return. The Fed's balance sheet requires it!

Lone Wolf wrote:

Gumby wrote: If the government prints money to buy a home, are any net new financial assets are added to the private sector? No, because now the government owns your home now. You simply converted your home's net worth into dollars (i.e. government liabilities). You aren't any richer than you were before (since you don't have a home now). The private sector just lost a house, but gained the equivalent in dollars.

The price for houses will not remain static while the Fed streams money off of the printing press to buy them up.

That's true. Good point. The supply of homes would diminish. My bad. But, my main point was that the public's balance sheet would remain the same (since the house is no longer owned by the public).

Lone Wolf wrote:

Gumby wrote: No net new financial assets in the private sector. No inflation because now there are more offsetting reserves being held at the Fed.

I'm astonished by this statement.  I must be misunderstanding you.  Have to be.

Do you mean to tell me that if the Fed embarked on a campaign whereby it printed money to buy every house in the United States, there would be no inflation?  The price for these houses would not change in any way?

If this is the case, it would be a simple matter for the government to buy up every resource on the planet.  Just keep the printing presses roaring and the entire planet happily accepts these dollars in exchange for every real good under the sun.

I confess, I was wrong about the no inflation. Rising asset prices show that's what QE did. Again, my bad.

No problem at all.  It's been a really fun discussion.

It's nice that even though we're viewing these issues via different macroeconomic models, things do more or less converge in the end.