Gyroscopic Investing

moda0306 wrote:Deficit spending on the other had, whether printed out of thin air or financed by trading bonds for savers' cash, is what's increasing the net financial assets in the economy that influences peoples' decisions.

Exactly.

You know that "Debt Clock" in Times Square?...

[align=center][/align]

...It could easily be renamed the National Savings Clock because it is nothing more than a representation of incredibly liquid private sector savings. Treasury Bonds are really public sector savings accounts held at the Treasury.

Gumby wrote: We are going in circles. In the example you gave, Lone Wolf is no richer at the end of the process than he was at the beginning of the process, correct? So, please explain how Lone Wolf can possibly create inflation if he is no richer from having exchanged his Treasuries for cold hard cash with the government.

Because you erased $15T of Treasury obligations and replaced them with trinkets.  Formerly, taxpayers were on the hook for $15T.  You wiped that clean.

Now who's paying the taxes necessary to fund the good and services that this $15T purchased?  Nobody, that's who.

Liabilities of the Federal Government are paid for with taxation.  You just wiped all that out.  If it's that simple and has no inflationary side-effects then why should I ever pay any taxes ever again?

Gumby wrote: The accounting doesn't bother me at all because Lone Wolf didn't get any richer at the end of the process. Seriously, that's all there is to it. The Fed takes the Treasuries and buries them in a giant hole because the Treasury instructed them to do so. The government has the power to do this. The liabilities are extinguished and Lone Wolf has the exact same spending power as he did when all this started. You are so close to getting this.

Taxpayers are now blowing off $15T in debt, the equivalent of our entire GDP.  You erased $15T in Treasury liabilities, remember?  Everyone's "richer" in nominal terms (and about to become much poorer in real terms as massive inflation sets in.)

Blowing off $15T in taxpayer debt is the "lunch".  Do you still believe that this "lunch" is free?

LW,

Since when is a bond a promise to collect that amount in tax when it is liquidated?  That's exactly the point we're making... we DON'T need to tax, and to be honest investors wouldn't be so egar to invest in treasury bonds if we DID need to tax, thereby putting default risk inot the situation

There is no expectation by anyone of such an action.  

You seem to believe that we invest in treasury bonds because we expect to be paid back with someone's tax dollars.

This is not why we invest in treasury bonds... we buy treasuries because we want to save in our domestic currency, and collecting a little interest to boot is never a bad thing.  These things still hold purchasing power.  We haven't promised to delay consumption, nor has the treasury promised to tax someone to pay us back.

Bonds do not delay possible consumption.

Cash does not indicate immediate consumption.

Balance sheet balances and future cash-flows dictate consumption and savings, not whether a part of those is in ultra-liquid vs super-liquid assets.

There is NO liability by the treasury other than to print, again, the printed money that was destroyed when the bond was issued.  

Lone Wolf wrote:

Gumby wrote: We are going in circles. In the example you gave, Lone Wolf is no richer at the end of the process than he was at the beginning of the process, correct? So, please explain how Lone Wolf can possibly create inflation if he is no richer from having exchanged his Treasuries for cold hard cash with the government.

Because you erased $15T of Treasury obligations and replaced them with trinkets.

Trinkets? I think you mean dollars. Who said anything about trinkets? Are you saying all coins are "trinkets"? Last time I checked, all coins were debt-free legal tender.

I hope you understand that whether or not that money was ever going to be collected from tax payers (and it won't be, because that would eliminate most of the base money supply) the spending power you fear already exists in the public sector as highly liquid Treasury bonds that can instantly be converted into spendable dollars in an instant. Somehow you seem to ignore this glaring fact every time any of us bring it up. If you're Quantity of Money Theory were correct (and it's not) you'd already see the inflation you speak of because the highly liquid savings you fear already exists in the private sector as Treasury Bonds, waiting to be spent like money in a bank savings account.

Lone Wolf wrote:Formerly, taxpayers were on the hook for $15T.  You wiped that clean.

Huh? In the beginning of the example you gave, taxpayers were on the hook for the interest received from the Treasury Bonds. After exchanging their Treasury bonds for dollars, those tax payers will still be receiving interest from banks, CDs, etc. and will need to pay taxes on that interest. If anything, that taxation on private lending sucks money out of the private sector — causing deflation.

Lone Wolf wrote:Now who's paying the taxes necessary to fund the good and services that this $15T purchased?  Nobody, that's who.

LW, now you're contradicting yourself. In one sentence, you freely admit that the government has the power to create $15 trillion out of a few pieces of metal. In the next sentence, you go back to believing that the government actually needs to use taxes to fund itself. It doesn't — particularly if it can mint as much debt-free coinage as it wants to.

Lone Wolf wrote:Liabilities of the Federal Government are paid for with taxation.  You just wiped all that out.

 
Taxes don't fund anything. We haven't had a reserve constrained government since 1971. Ever notice how the government can spend so much even though taxes don't come even close to paying for government spending? The truth is that the money from taxes is basically going into a gigantic virtual garbage can because the government can create as many dollars as it needs to spend.

Taxes simply remove money from the public sector (and some taxes help decide what kinds of things people may or may not spend their money on). The point is that a fiat government doesn't need any "revenue". Before we were fiat, our government needed revenue. Now we don't.

Remember, our country became fiat in 1971, but Congress never changed the laws. So, everyone thinks we are still somehow constrained by tax revenue, even though that makes no sense in a fiat monetary system. You don't think it's a little odd that Congress never changed the most basic laws on how our government funds itself after we became fiat? I'm willing to bet most Congressional members never even understood how fiat monetary systems worked in 1971. Many probably still don't. All this political mischaracterization of our monetary system is repeated by the media and textbooks.

Lone Wolf wrote:If it's that simple and has no inflationary side-effects then why should I ever pay any taxes ever again?

Because you will go to jail if you don't. Having to pay your taxes with dollars gives those "trinkets" real value and legitimacy.

Lone Wolf wrote:Taxpayers are now blowing off $15T in debt, the equivalent of our entire GDP.  You erased $15T in Treasury liabilities, remember?  Everyone's "richer" in nominal terms (and about to become much poorer in real terms as massive inflation sets in.)

Blowing off $15T in taxpayer debt is the "lunch".  Do you still believe that this "lunch" is free?

Please, please, tell me you understand what the word "fiat" is? Fiat means having a printing press to create an infinite supply of money. Therefore, a government with a printing press does not need to "tax" or "borrow" anything to fund itself. The only reason you think we need to tax and borrow is because that's what we used to do pre-1971 and nobody took ten minutes to realize how ridiculous that notion is in a fiat monetary system. With a printing press, the only thing the government needs to worry about is inflation. So, long as people are unemployed and the public sector has private debts to pay back, there is no disposable income to drive up prices and any excess demand can be soaked up by hiring those unemployed workers. That's why the Quantity Theory of Money is false in the short term. Over the long term, taxes may be necessary to destroy the money supply if there's too much disposable income or not enough unemployed that can be hired to soak up extra demand.

I realize that this is an unorthadox view of how our money system works. Understanding it requires letting go of gold-standard era beliefs that we were all taught in school.

Gumby wrote: I'm sorry, trinkets? I think you mean dollars. Who said anything about trinkets? Are you saying all coins are "trinkets"? Last time I checked, coins were debt-free legal tender.

How do coins become trinkets?  When you hammer out $15T of them and use them to pay your debts.  That's one way to do it.

Gumby wrote: Huh? In the beginning of the example you gave, taxpayers were on the hook for the interest received from the Treasury Bonds. After exchanging their Treasury bonds for dollars, those tax payers will still be receiving interest from banks, CDs, etc. and will need to pay taxes on that interest. If anything, that taxation on private lending sucks money out of the private sector — causing deflation.

They used to be on the hook for the principal.  Not anymore.

You're comparing the taxes on interest received to the burden of paying actual interest and paying actual principal?  That's an incredible difference in scale.

Gumby wrote:LW, now you're contradicting yourself. In one sentence, you freely admit that the government has the power to create $15 trillion out of a few pieces of metal. In the next sentence, you go back to believing that the government actually needs to use taxes to fund itself. It doesn't — particularly if it can mint as much debt-free coinage as it wants to.

My point is obviously that a government can fund itself via taxation OR by printing up a lot of currency and creating inflation.  I can't make it any simpler than that.

I'm just telling you that there's no such thing as a free lunch.  Don't shoot the messenger.  I'm not the first person to say this.

Gumby wrote: I'm willing to bet most Congressional members never even understood how fiat monetary systems worked in 1971. Many probably still don't. All this political mischaracterization of our monetary system is repeated
...
Please, please, tell me you understand what the word "fiat" is?
...
nobody took ten minutes to realize how ridiculous that notion is in a fiat monetary system.

Don't you find it strange that MMT is forcing you to conclude that nobody but you and those inside this tiny, insular MMT'er group understand the first thing about money?  Nobody -- no mainstream economists, not the Fed, not the ECB, not Harry Browne -- "took ten minutes" to realize how fiat money works.  Everyone else is drooling into a cup and has no earthly idea what "fiat" money is.  Only these guys on the internet that are trying to revive Chartalism have it all well and truly figured out.

I understand you're frustrated that I don't agree with your monetary worldview, but what can I say?  I just don't think it holds up nearly as well as you believe.

Anyway, that's enough MMT talk for me.  Interesting discussion.

LW,

If you ever decide to come back to this discussion:

1) Your example about printing currency to create inflation... it's not the printing of currency that creates inflation (if it's simply done to acquire other financial assets) so much as the expansion of net financial assets... this doesn't happen when you pay down debt with printed money. It happens when you deficit spend with and issue bonds that are promises to simply pay back printed money.  Like I said, $1 Trillion of increased deficit spending would be MUCH more impactful than $1 Trillion of QE because you've increased the net financial assets with the former, not the latter.  It's the increase in net financial assets that makes people want to go out and trade those assets for real stuff instead of holding onto it in terms of savings, not the conversion of those assets from cash to bonds. 

2) Who is calling for a free lunch?  Full employment involves people getting out of bed at 7:00 AM, driving to work, and building something or providing services.  There's no free lunch with proper monetary policy, there's just lunch for those willing to pay for it.  Right now, we can't even get lunch to those with skills who are trying to offer those skills to others for dollars.  Avoiding the systemic risk of a pegged currency is hardly suggesting there's a free luch... just avoiding self-fulfilling panic and not enough currency for the economy to run smoothly.  People still have to work hard and do a good job to compete.  The free lunch accusation is a straw man gold bugs throw up.  The purpose of financial assets isn't to increase wealth directly, but give people the tools to make the economy work, at the cost of them actually having to go out and work.

If anything, a big spike in spending and a round of tax cuts is what would spike inflation (though only after putting millions back to work, IMO).... NOT more QE... and that is the fundamental thing to understand... the NFA's (net financial assets) created by deficit spending is what drives peoples' will to divest themselves of currency/bonds (spend), NOT the fact that currency makes up 70% of that mix instead of 30%.

You can say this is immoral or unreasonable to use as a tool to help the economy, and that's a discussion to have, but I think that's the thing that it took me a while to understand and despite my reservations about tooling around with the money supply, it's the imperative thing to understand to people trying to observe our economy and pick up signals as to whether we'll see inflation or not.

Lone Wolf wrote:Don't you find it strange that MMT is forcing you to conclude that nobody but you and those inside this tiny, insular MMT'er group understand the first thing about money?  Nobody -- no mainstream economists, not the Fed, not the ECB, not Harry Browne -- "took ten minutes" to realize how fiat money works.  Everyone else is drooling into a cup and has no earthly idea what "fiat" money is.  Only these guys on the internet that are trying to revive Chartalism have it all well and truly figured out.

No. Not really. Harry Browne clearly understood that the Quantity Money Theory is not true — especially in the short term. (The Quantity Money Theory basically says that the inflation rate is a function of the monetary growth rate.) Oddly, you don't seem to comprehend that it's false, even though real world events have proved otherwise for decades. Browne explained this many times on his radio show, saying that inflation is the demand for money, not a function of the actual money supply. The Fed and every mainstream economist realizes this, but somehow you seem to miss this every time anyone points this out. MMT just describes how it all comes together. The fact that mainstreamers don't understand how the Treasury and Fed actually work is to be expected.

Lone Wolf wrote:Anyway, that's enough MMT talk for me.  Interesting discussion.

The oddest part of this entire discussion is your inability to reconcile that the Quantity Money Theory has been proven false by the fact that highly liquid Treasuries already exist in the public sector and aren't causing inflation right now. This has nothing to do with MMT. You can't seem to explain how all these trillions in Treasuries and dollars floating around us every day aren't causing inflation right this second. Nevertheless, I appreciate you taking the time to understand it. It was fun!

It really is an excellent discussion... I'd possibly be frustrated with LW, but to be honest his points have made me think of things differently and actually understand MMT even better than I had before.

The whole idea one has to realize, too, is that if we don't run deficits to the degree we have a balance of trade deficit, our private sector savings will go down by mathmatical necessity.  Literally, the only source of private sector savings without a liability attached to it is our deficits... unless you count coconuts and canned corn as "savings."

moda0306 wrote:Literally, the only source of private sector savings without a liability attached to it is our deficits... unless you count coconuts and canned corn as "savings."

Exactly. All money comes from either private sector debt or federal debt (with exception to money that is minted from or is backed by a monetary metal).

Money is debt, in our monetary system.

See: YouTube: Where Does Money Come From?

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The funds to pay taxes and buy government securities come from government spending, period.

Gumby,

If you were king for a day what would you do to fix the economy?

I guess without getting into a bunch of regulatory reform ideas, I'd probably enact payroll & income tax cuts (ordinary income, not investment income & capital gains)... then I'd probably enact infrastructural spending until we started getting into make-work jobs and then stop.  Then I'd send stimulus checks out.

If unemployment isn't well on its way to 5%... lather, rinse, and repeat.

By the time I was done, we'd have full employment, better private-sector balance sheets, and, yes, probably higher prices of commodities.

moda0306 wrote:If you were king for a day what would you do to fix the economy?

Well, I'd start by not having me in charge.

Recently, I've started reading some of economist Warren Mosler's proposals (of MMT fame) from a few years ago. Some of them make sense, some of them I'm not sure about yet...

http://moslereconomics.com/wp-content/p ... posals.pdf
http://moslereconomics.com/proposals/

Though, 99% of the population wouldn't be able to comprehend the reasons behind it and they are too far out of the mainstream (which he admits).

His most interesting proposal, in my opinion, is to just have the Treasury stop issuing Treasury Bonds. No more "debt" and it just pay it off as it matures by printing fresh money. It would work fine. We'd just slowly convert our savings from Treasuries to another form of savings.  

Anyway, I'm still scratching the surface of our fiat monetary system, so I really don't know if I'd be making smart choices or not. But, so far Mosler's ideas are intriguing from a "think different" perspective.

Yeah he's good.

I like all his simple bank regulations... not miles of "but, if, then, however," just very simple rules that would add a solid, solid foundation to the banking system.

Funny thing is, all these derivative instruments were supposed to make everything safer, theoretically, since they were efficient ways of spreading risk around.

Also... If I could fix one thing, it would probably be to take money out of politics. It's too corrupting. Lawrence Lessig has some very interesting proposals and justifications for "Citizen-funded elections":

http://www.thenation.com/article/how-ge ... cracy-back

Gumby, this quote from the link you put up gets to the heart of Lone Wolf's issue:
http://moslereconomics.com/2009/12/26/f ... all-banks/
"Recall the ‘500 billion euro day’ back in 2008 when the ECB added that many euro in reserves to its banking system, and a week later the monetarists pouring over the data ‘couldn’t find it.’ The fact that they even looked was evidence enough they had no actual knowledge of reserve accounting and monetary operations. And, more recently, the notion that ‘quantitative easing’ makes any difference at all apart from changes in interest rates (it’s always about price and not quantity) reinforces the point that there is very little understanding of monetary operations and reserve accounting. While Professor Goodhart did declare quantitative easing in the UK a ‘success’ he did so on the basis of how it restored ‘confidence,’ making it clear that there was no actual monetary channel of causation from excess reserves to lending. Banks do not ‘lend out’ reserves. Loans create their own deposits. Total reserves are not diminished by lending. This is operational and accounting fact, and not theory or philosophy."

Like I said though, I've got problems with MMT (though different ones than Lone Wolf). When you say that it would be unpopular to not have deficit spending in response to private sector deleveraging, I think it is vital to unpick what form deficits (or balanced budgets) take and what type of deleveraging is taking place. Deleveraging could come about by housholds having cash to spare and so buying stuff outright rather than with credit. Companies may move to operating like Apple and being debt free. That would be massive deleveraging but it would be welcomed by most people. It could occur in the context of balanced budgets. If tax was moved to being just an asset tax, then people could use money that would have been spent on income tax, sales tax etc on instead becoming debt free. Companies would not be paying corporation tax and so could use profits to become debt free. All the strain could be taken by asset values.
Deficits can take a form that does nothing to help. If there is a financial crisis because someone owes more money than they can aford to pay back, then a deficit in the from of tax cuts for the creditor does nothing to ease that situation.

Lone Wolf, in the UK we still have some undated/perpetual bonds such as the "gilt consols" and the "war loan" (the war being WWI). The consols are a couple of hundred years old. Don't you find it a struggle to argue that those perpetual bonds leave the UK treasury liable for the principle? Don't you recognise that in reality the stock of treasury debt is continuously rolled over so that it might as well all be perpetual bonds as used to be the case in 1700s UK?

Reading those Mosler proposals, I'm still struck by a deep seated problem with it all. He's suggesting having unlimited interest free credit and then using stringent regulation (all of it sensible sounding) to keep the banks in check. I just feel that the unstop-able force of the unlimited interest free credit is bound to always brush aside the inevitably all too movable obstacle of the hoped for regulation. Even if I could suspend disbelief and accept that the banks would be restrained, it still leaves enormous power in the hands of the people who are deciding who to bestow with the credit. Basically lending money to someone to employ 10000 people for ten years is ineffect deciding that 10000 people should obey the authority of the person you have made that huge loan to. I don't think it is enough to just have a system that potentially keeps people busy. It is also important to have a system that  ensures that what people have to do is what people want done.

stone wrote: Reading those Mosler proposals, I'm still struck by a deep seated problem with it all. He's suggesting having unlimited interest free credit and then using stringent regulation (all of it sensible sounding) to keep the banks in check. I just feel that the unstop-able force of the unlimited interest free credit is bound to always brush aside the inevitably all too movable obstacle of the hoped for regulation. Even if I could suspend disbelief and accept that the banks would be restrained, it still leaves enormous power in the hands of the people who are deciding who to bestow with the credit. Basically lending money to someone to employ 10000 people for ten years is ineffect deciding that 10000 people should obey the authority of the person you have made that huge loan to. I don't think it is enough to just have a system that potentially keeps people busy. It is also important to have a system that  ensures that what people have to do is what people want done.

Yes, I agree. I believe Ellen Brown — who also understands how fiat money works — has been supporting an idea for more public state banks that could issue interest free loans for things that actually make sense for citizens of a particular state (tuition, small local business, etc).

Gumby & stone,

How much do you blame "low rates" for malinvestment in housing and the tech bubble?

Recently I've been reading some of Ellen Brown's blog and she has pointed out something very interesting.. Marriner Eccles, Governor of the Federal Reserve Board understood that the US government had the ability and, at times, the moral obligation to create money out of thin air. As you might imagine most people could not comprehend what he was saying in the first half of the 20th century.

In hearings before the House Committee on Banking and Currency in 1941. Wright Patman asked Eccles how the Federal Reserve got the money to buy government bonds.

“We created it,”? Eccles replied.

“Out of what?”?

“Out of the right to issue credit money.”?

“And there is nothing behind it, is the­re, except our government’s credit?”?

“That is what our money system is,”? Eccles replied. “If there were no debts in our money system, there wouldn’t be any money.”?

If Lone Wolf were alive in 1941, like most people he would have thought that the Governor of the Fed was crazy. But he wasn't. He was actually one of the few people who understood where money actually came from, how it was issued and what gave it value.

Perhaps even more interesting was his testimony 1933 Senate Testimony:

http://fraser.stlouisfed.org/docs/meltzer/ecctes33.pdf

Mr. ECCLES. The maladjustment referred to must be corrected before there can be the necessary velocity of money. I see no way of correcting this situation except through Government action.

It is estimated that one-third of our population is dependent upon agriculture in its varied forms and it is recognized that prosperity is impossible without a revival of the purchasing power of our agricultural population. To bring about the restoration of business to the average of the postwar period I have to suggest five points as first-aid measures designed to bring about recovery. Action with reference to these should be taken immediately. They are as follows:

First. Make available as gift to the States on a per capita basis $500,000,000 to be used during the balance of this year in assisting to adequately take care of the destitute and unemployed, pending a revival in business which should result from the following program.

Senator WALSH of Massachusetts. Is that a gift or a loan?

Mr. ECCLES. I am covering it here. I am first outlining them and then I cover each point individually in detail.

Senator GORE. We passed a law the other day in which among other things we gave the District of Columbia $600,000. Now they are asking for $200,000 more. I was talking to the head of the community chest of this city and he said that the representatives who distribute this fund came here to Congress and lobbied and got that $600,000 without ever asking him about it; without even getting an estimate from him. Yesterday two Senators advised the District Commissioners to turn in a request for $250,000 more. And they will do it, and they will get it. There is Dot any end to that business.

Senator SHORTRIDGE. Did you suggest a fund of $500,000,000?

Senator WALSH of Massachusetts. I wish you would read that first suggestion again.

Mr. ECCLES. First. Make available as gift to the States on a per capita basis $500,000,000 to be used during the balance of this year in assisting to adequately take care of the destitute and unemployed, pending a revival in business which should result from the following program.

Second. Increase the amount of Government funds——

Senator WALSH of Massachusetts. You are coming back to a discussion of that first point when you finish giving the five points you referred to?

Mr. ECCLES. Yes.

Second. Increase the amount of Government funds to two ar,d a half billion dollars, and more if necessary, for self-liquidating projects and loans to cities, counties, and States for public works on a liberal basis at a low rate of interest.

Senator WALSH of Massachusetts. How large is that amount?

Mr. ECCLES. TWO and one-half billion dollars.

Senator GORE. We passed a bill the other day doing away with the self-liquidating feature. You know as you start this you do not stop. It gets worse and worse.

Mr. ECCLES. Third. The adoption of the domestic allotment plan, or a similar plan, designed to regulate production and raise prices.

Fourth. Refinancing farm mortgages on a long term basis at a low rate of interest.

Fifth. A permanent settlement of the interallied debts on a sound economic basis, cancellation being preferable.

Senator SHORTRIDGE. What! Cancel all those debts?

Mr. ECCLES. I will get to that in just a minute.

Senator SHORTRIDGE. Well, go on.

Mr, ECCLES. I will cover those points.

Point No. 1. Unemployment relief. Without going into any detail or figures, it is recognized by everyone that our most urgent and acute problem to-day is to immediately provide adequate relief to the millions of our people who are destitute and unemployed in every corner of our Nation. It is national disgrace that such suffering should be permitted in this, the wealthiest country in the world. The present condition is not the fault of the unemployed, but that of our business, financial, and political leadership. It is incomprehensible that the people of this country should very much longer stupidly continue to suffer the wastes, the bread lines, the suicides, and the despair, and be forced to die, steal, or accept a miserable pittance in the form of charity which they resent, and properly resent. We shall either adopt a plan which will meet this situation under capitalism, or a plan will be adopted for us which will operate without capitalism.

Private charity is almost entirely exhausted. It is impossible for most of our political subdivisions to provide additional funds through borrowing or taxation. Many of them are in default at the present time in the meeting of their obligations and are unable to provide funds necessary to pay the expense of their schools and local government. I am on the Governor's Executive Unemployment Relief Committee of my State and although I am sure the unemployed receive as much or more than in many sections of the country, available funds are entirely inadequate to meet the situation, which is daily becoming more difficult to control.

I advocate that the Government make available, as the most urgent of all emergency measures, at least $500,000,000 to be distributed to the States as required, as a gift and not as a loan, on a per capita basis in such amounts as will enable the relief organizations of each State to take care of the needs of the unemployed in a more adequate manner than has heretofore been possible. For this reason, that when it is made as a loan there is a resistance to borrowing. There is a cutting down to a point of starvation. When a State has to borrow the money that is the attitude of the public officials of the State as a result of the demands of business leaders and taxpayers generally for economy.

Senator WALSH of Massachusetts. When it is a gift the lid is off?

Senator GORE. Where does the Federal Government get this money to give to the States?

Mr. ECCLES. Where did it get $27,000,000,000 during the war to waste?

Senator GORE. A very different situation.

Senator WALSH of Massachusetts. Let him finish his two sentences under No. 1 and then we will ask him some questions.

Mr. ECCLES, TO do less would be to fail in the first duty of government, the protection of the lives of its citizens. This support of the unemployed by Government should rapidly decrease as appropriate action is taken by the Government to restore the proper functioning of our economic system.

Senator WALSH of Massachusetts. Now may I ask you a few questions?

Mr. ECCLES. I am just wondering if it is all right to continue with my statement, Senator. Maybe the questions will be answered during the course of my statement.

Senator WALSH of Massachusetts, I would like to discuss this thing with you.

Mr. ECCLES. Yes.

Senator WALSH of Massachusetts. Is it a fact that the greatestdistress in this country to-day is in the large centers of population?

Mr. ECCLES. Well, I am not in a position to say what the distress is in the larger cities.

Senator WALSH of Massachusetts. Are there not many more million people in need and distress in the large centers of population rather than in the farming districts?

Mr. ECCLES. I believe that is true.

Senator WALSH of Massachusetts. You are asking the Federal Government to give money to New York State in large volume, to Massachusetts in large volume, to Ohio in large volume, and to Illinois in large volume, on the theory that they, the richest States in the Union, from whom the Federal Government must get it money, can not support this situation. How can you justify that?

Mr. ECCLES. On this ground

Senator WALSH of Massachusetts. How can you justify giving money out of the Federal Treasury to the State of New York, whose per capita indebtedness is insignificant compared to the Federal Government, who is the great treasure house for the Federal Government to go to for its money, on the theory that it is so bankrupt, it is so helpless that it can not take care of its poor and starving people? We might as well confess bankruptcy if we ever reach that situation.

Mr. ECCLES. Well, there is this difference. A State, of course, is in the same financial category as corporations and individuals in that they do not have the power of issuing money or credit. The Federal Government is entirely in a different category because it controls the money system. It is true that the State of New York and the State of Pennsylvania and these other States are creditor sections, not debtor States. In other words, the wealth of the State is less than the wealth of the people living in the State.

Senator WALSH of Massachusetts. I do not follow you. The State has the same power of taxation as the Federal Government.

Mr. ECCLES. That is true. But to-day you have not the basis of taxation, for the reason that the production of wealth has largely stopped through unemployment. Now the credit of the Federal Government is in relation to the national income. If the national income is cut in two, then it goes a long way to destroying the credit of the Federal Government on a gold basis.

Senator GORE. YOU do not think there is any way to destroy the credit of the Federal Government, do you?

Senator WALSH of Massachusetts. Senator Gore, may I finish my inquiry?

Senator GORE. Senator, he said it might destroy the credit of the Federal Government. I did not think that it was possible to destroy the credit of the Federal Government; that it was just inexhaustible and infinite. Pardon me for interrupting, Senator.

Source: http://fraser.stlouisfed.org/docs/meltzer/ecctes33.pdf

The testimony goes on as Senator Walsh remains perplexed by the idea that money can be created out of thin air with no consequences while unemployment is high. Edison would have agreed with Eccles.

Moda, I think the whole low rates = bubbles debate is complex. I think Warren Mosler's suggestion that banks should only make domestic loans is very relevant.  Currently banks borrow where ever rates are low and lend where ever rates are high. So for the  housing bubbles the borrowing was in Japan and the carry trade was to lend in USA, Europe, Iceland etc
http://en.wikipedia.org/wiki/Carry_(investment)
"By early year 2007, it was estimated that some US$1 trillion may have been staked on the yen carry trade.[5] Since the mid-90's, the Bank of Japan has set Japanese interest rates at very low levels making it profitable to borrow Japanese yen to fund activities in other currencies.[6] These activities include subprime lending in the USA, and funding of emerging markets, especially BRIC countries and resource rich countries. The trade largely collapsed in 2008 particularly in regards to the yen."

Since then there has been a carry trade from the USA to Australia etc. So Australia has had a housing bubble despite 6% rates whilst the USA has been apparently bubble free despite near zero rates. Basically what limits loan creation is the decision of the banks not the decision of the borrowers (you can always find people dumb enough to borrow whatever the rates). So banks will try and lend so long as there is a big spread between what they borrow at and what they lend at. I supose Warren Mosler's proposed reforms are all to ensure that banks lend directly to the domestic retail borrower and then remain on the hook until the loan is repaid (or not).

I think Bill Mitchell goes one further than Warren Mosler and says that banks should not be able to make secured loans of any sort (rather than simply not being able to make loans with financial assets as colateral). I do see that Bill Mitchell's rule might stop bubbles but I'm not sure it would be workable. If you lived in a huge house with loads of gold coins or whatever could you say to the bank that you had been made redundant and so couldn't repay your loan???

I still think having tax as an asset tax is what is needed to avoid bubbles. If it is the asset value that gets taxed then people will think very carefully before bidding up the price of something.

If you are "bidding up the price of something" for the purpose of getting rid of it quickly, I highly doubt that an asset tax will dissuade you from doing so.

In fact, it's much more likely that an income tax that's not going to be released until something is sold would actually prevent the quick run up and sale of assets... not that either one will really give too much of a disincentive.

I still wonder how much power any one player in the market has to not only "cause" a bubble, but getting out before it pops.

How about... http://pragcap.com/20-down-is-a-good-regulation

?

moda0306 wrote: If you are "bidding up the price of something" for the purpose of getting rid of it quickly, I highly doubt that an asset tax will dissuade you from doing so.
In fact, it's much more likely that an income tax that's not going to be released until something is sold would actually prevent the quick run up and sale of assets... not that either one will really give too much of a disincentive.
I still wonder how much power any one player in the market has to not only "cause" a bubble, but getting out before it pops.

moda, even if someone still tried to get rich by bubble riding, the fact that the entire tax burden was coming out of asset taxes would mean that unless the assets were earning a return, the asset tax would soon erode their asset holdings. Basically an asset tax would mean that assets would have to earn their keep. To my mind that by definition means that they could not attain excessive valuations.

Gumby wrote: I believe Ellen Brown — who also understands how fiat money works — has been supporting an idea for more public state banks that could issue interest free loans for things that actually make sense for citizens of a particular state (tuition, small local business, etc).

To my mind it would be even better to take localism to its ultimate conclusion which is to simply pay out a citizens dividend to each individual. The state bank idea is based on the concept that the state bank is better at deciding who does what than individuals are. I doubt that. A citizens' dividend would enable start ups to essentially just consist of groupings of people who worked together using the citizens' dividend to tide them over until their company started earning. Credit is basically a way that banks can direct resource allocation. To my mind banks make a poor job of that. Entrepreneurs (who have accumulated money against the headwind of an asset tax) in conjunction with individuals freed up by a citizen's dividend would IMO make a better job of resource allocation.

It was different back then.  The monetary base was attached to a much larger array of financial accounts compared to today where just on-demand checking accounts are left with any reserve requirements.  That is one the main reason increasing the monetary base will have limited effect.  Even in more recent history with the stupendous increase of the monetary base, it will not act inflationary until all the banks dump all the bonds onto the marketplace that does not want it.  That will only happen when the economy recovers.  Classic supply and demand plays a role in reserves and subsequently any subsequent inflation or disinflation.

MG

moda0306 wrote: Even Milton Friedman was a monetarist... he thought more agressive expansion of the money supply during the depression would have helped a great deal.