Gyroscopic Investing

I would like to reiterate (or simply iterate, if I haven't made it clear before) that if you go to the MMR site, and follow Cullen Roche, you'll realize how much he realizes that investment & production drive prosperity in the private sector.  Money is simply a way to facilitate the creation of real wealth.  Without real wealth, fiat money & contracts (what we call "financial assets) would be quite worthless.  He (or, more accurately, one of his colleagues) came up with the equation S=I+(S-I), or Savings = Investment + (Savings - Investment) to help clarify and visualize what they're trying to say.  We've even gone as far to agree that while we refer to them as "net financial assets" when the gov't issues them, there really is a liability there... the liability that the gov't maintain an environment where the economy can work productively and efficiently.  However, there really is no true "financial liability" if you look at the system as a whole.

Don't laugh too hard.. there's more to that equation than it seems.  It should probably be pointed out that "saving" is choosing to not spend income, and "Investing" is actually creating real, tangible value/wealth… well patents & ideas count too, but not contractual wealth is what I'm getting at.

The original equation is S=I (saving equals investment) qualifies in private sector currency systems, including coins & contracts (IOUs).  The aggregate saving of the private sector in a one year period is equal to the net investment in that same year.  This makes sense as it means that our accounting for income not spent (saving) matches our accounting for value created but not depleted (investment).


Private-only currencies are inherantly and self-fulfillingly unstable.  A shock can throw them into creating years of misery where productive people stand in a Mexican Standoff.  We have a mix.  We have the government issue financial assets ((S-I) in the equation above), but banks and investors leverage those assets in combination with their own ingenuity to create the Investment (I) part of the more broad equation.  So, they're arguing that a system of public money issuing and private (well-regulated... they're not saying what we have now is ideal) banking/investing is can create monetary flexibility that makes sure that the private sector is able to fulfill its desire to net save (saving without investing).  This happens during recessions, when everyone is trying to save, but can't, unless investment occurs.  Investment in aggregate won't occur if demand isn't high enough.... you know how the viscious cycle works.

MMR (or, more specifically, Cullen Roche and some of his cohorts) insists that a healthy system of investment is going to come best from a reliable demand outlook, and a mixed currency can provide society that... mixed meaning, again, vertical assets created by government and horizontal loaning/investing done by the private sector that expands money further.

So the logic is, when society is desiring to net save (wanting to save without ofsetting investment occuring often happens in recessions) should be met with government deficits (in excess of the trade deficit) to give society that will and bring supply/demand into equilibrium.  Investment actually prefers a stable demand outlook, and demand requires a system of rewarding (or not overly-punishing) producers for supplying great ideas and wealth to society.

But again... it's all built on investment & production.  All this talk of financial assets can make us for get that, or assume that Gumby & I think pieces of paper printed by government are in the same league as the next Steve Jobs coming up with amazing ideas to implement.

moda0306 wrote: So when someone says the treasury "spends money into existence," they're correct, because bonds are money.

This a different definition than I think you've ever used before.  Anyhow, I can't decode it -- just like any bond issuer, the Treasury doesn't "spend" the bond.  They sell it to a buyer.  They then spend the money that the buyer used to purchase the bond.  I don't see how the bond itself is now spent into existence.

moda0306 wrote:Does it really help us to look at the fed & treasury as fully independent of each other when trying to visualize the nature of the monetary system?  No.  Does it help us to view base money as money but a 1-year T-bill as something fundamentally different?  No.  Does it help us to view the fed as an independent entity?  Absolutely not.

If a model is to be of any use to me, it needs to model the world as it actually works, not an idealized chartalist system that has never (to my knowledge) existed on the scale of a nation.  The latter is interesting to be sure but of greatly reduced value to my understanding of the present.  (I would argue that confusing fantasy and metaphor with reality is one of the disservices MMT has rendered.)

moda0306 wrote: the fact that the fed MUST ensure that the treasury remains solvent basically changes the whole meaning of these bonds.  It makes them almost equivalent to base money.  HB told us this.

The Fed makes sure that the Treasury will always succeed any time it attempts to borrow from the private sector.  They are in this sense "beholden" to the Treasury.

The Fed does not give the Treasury access to its printing press.  Thus HB is speculating (correctly IMO) that in times of completely dire emergency the Treasury would get its hands on the power of the printing press to "do what must be done".

This would be situations such as where the Treasury's account was literally about to go negative and no further money could be borrowed.  This is the absolute last domino to fall before default and financial chaos.  You would be mistaken to consider any of this (currently illegal) activity to be standard operating procedure.  In all normal times (and throughout the history of our fiat experiment), the Treasury has obtained revenue in just two ways:

• Taxation from the private sector
• Borrowing from the private sector

Gumby wrote: LW, you often use the example of "Wolf Bonds," but Wolf Bonds aren't really accepted anywhere as a cash equivalent. In the private sector, Treasuries are as good as cash — which we know from the composition of our Permanent Portfolios.

Damn.  Need to make a quick adjustment to my Permanent Portfolio then.  Anyone want some wolf bonds?    Apart from the caveat that you must exchange these Treasuries for real cash (which is easy) before you use them to purchase anything or pay off debt, I agree that they are nearly as good as cash on hand.

I would describe Treasuries as extremely liquid, totally reliable assets.  If I want to use my car to buy groceries it's going to be quite a few steps before I've liquidated it.  With a Treasury, even though I can't buy my groceries with it or pay debt with it directly, there's always someone out there who will eagerly give me cash for it within milliseconds.

LW & Gumby,

I think where we're breaking down now is what the true implications of the fed's responsibilities to the treasury are.

Gumby & I think it completely changes the nature of bonds, taxes, and the fed's power itself.

LW thinks (correct me if I'm wrong) its just another rule that doesn't really mean the fed isn't the currency issuer and the treasury is just a user.

I'll round out this short post by saying that if Entity A is a currency user, and Entity B is a currency issuer, but Entity B is really beholden to Entity A, then I'd consider both Entity A and Entity B issuers of currency, and their interactions have to be reexamined.

Are we getting somewhere?

LW,

The fed & member banks are tightly linked enough, in descriptions I've seen, where there will ALWAYS be a market for treasuries.  Is it a clumbsy contractual connection?  Yes.  Does it mean that the fed is an independent currency issuer?  No.  It's part of the government's money creation system.  The government has arranged it, clumsily, to mimmick a system where the government as a whole is a money-issuing entity, not just an independent fed.

Also, whether the bonds is bought or given I think is semantics.  We "sell" our currency to people when we "buy" their stuff.  Government can either buy products/services of the private sector or simply credit peoples' bank accounts for doing nothing... either way it's giving them a financial asset they didn't have before.  When the fed arranges a treasury auction with banks that already have a bunch of US dollars on their balance sheet, treasuries (the rate of which the fed controls) are then bought by banks who are forced to participate... why would they want to?  They have tons of dollars in their system that they'd rather earn interest on than not.  They don't put up a fuss.  They "buy" treasuries with their dollars.  It's all just transactions.

The problem, LW, is that it seems like you're trying to look at certain "functional realities" of the system that have been around since the gold standard, while downplaying others that tend to completely transform the power structure of the money-issuance process.  MMR has recently dove into the relationship between the treasury, fed and member banks, and I'll try to come up with something... it's just these things are sometimes buried in comments sections.

LW,

If treasury bonds are "totally reliable," then the treasury is part of the money-creation mechanism as a partner of the fed.  If my Moda Bonds were "totally reliable" because the fed & member banks are functionally & statutorily obligated to make them liquid, this would basically give me a huge amount of power over the entire monetary system (which I'd use for good (giving money out to replenish balance sheets), and for evil (a Porsche in the driveway of a mansion sounds nice)... probably the latter before the former  .  I could spend to my hearts content, and they'd (the fed & member banks) have to engineer a reconstruction of my account into solvency.  This changed the game.  They are my puppets.

moda0306 wrote: I'll round out this short post by saying that if Entity A is a currency user, and Entity B is a currency issuer, but Entity B is really beholden to Entity A, then I'd consider both Entity A and Entity B issuers of currency

"Beholden" is quite vague.  If you can, try to be very specific in what you mean on this one.

I'd say that entity A is a currency issuer if and only if they have the ability to create money out of thin air (setting aside coins, bills, etc.)  As the Treasury is only able to tax the private sector or borrow from the private sector, they possess no means by which they can create money out of thin air.

Yes, the Fed sets up auctions so that there will always be some buyer for US debt.  What the Fed does not do is grant the Treasury direct access to the printing press.  Even the bills that the Treasury prints are under the care of the Federal Reserve.  That's what an independent Central Bank is all about.

moda0306 wrote:The government has arranged it, clumsily, to mimmick a system where the government as a whole is a money-issuing entity, not just an independent fed.

The entity that issues the currency (essentially, the Fed) and the entity that uses the currency (the Treasury) are independent from one another.  There is no legal way for the Treasury to access the Fed's electronic printing press to replenish its account and such a thing has never been done before.

So long as the Treasury obtains all revenue exclusively via either taxation or borrowing money, this separation matters very, very much.

moda0306 wrote:The problem, LW, is that it seems like you're trying to look at certain "functional realities" of the system that have been around since the gold standard, while downplaying others that tend to completely transform the power structure of the money-issuance process.

Apart from the fact that Treasury auctions to the private sector are rigged to avoid catastrophic failure, tell me specifically which "transformative realities" aren't getting their due?  If you show me one that rivals the ability to create money out of thin air (exclusive to the Fed) you'll have my full attention!

The reality is that we (and all major industrialized nations) have an independent Central Bank.  Chartalism/MMT/MMR has no model for this and thus IMO is not a useful way to look at our system as it actually exists.  It perpetuates way too many misunderstandings (many of which we've worked through in the course of this thread -- see the list above.)

LW,

Like I said before, I will try to find some more meat fore you, but it all comes down to the fact that even though the fed can't directly fund the treasury, their hold over member banks guarantees as much.  I have read about nuances on this a bunch of times from MMR.  This creates a system that is much more complicated than it needs to be, and I am glad you rose your concerns and wish I was in a better position to lock them up entirely.  I believe that the treasury actually has authority over the fed, statutorily, in a piece once posted by Gumby. 

MMT/MMR has analyzed these relationships and deemed the fed to not be truly independent, but part of a greater money issuing entity called government.  I think we have to start diving into the operations of member banks to iron this out.  MMT/MMR has done this, but I can't find the analysis right now.

In spite of my frustration, you're challenging the nature of relationships that I took for granted... I still am almost positive I am right about this iron-clad relationship, but your concerns are testing the depth of my knowledge of the details.

Peace... and you're still wrong about WWII and the depression so there!!  Jk... Let's keep this one on MMT.

Quote from: melveyr on May 08, 2012, 09:16:57 PM
The Treasury offers a 1 year note with a $100 face value and a $10 coupon.
The banks know that they can sell this to the Fed whenever they want for $100 because of the Fed's interest rate policy.
The banks buy the bonds for $99.999999999 and sell to the Fed for $100 a small profit (hardly material because of the extreme amounts of competition).

At this point, the Treasury has taken on a $100 liability.  The Treasury can only fulfill such an obligation via taxation or future borrowing.  (It seems that we're all now universally on the same page that the Treasury doesn't literally "spend money into existence" but let me know if you disagree.)

It just did LW. The new $100 came about because they took on a liability i.e issued the 100Tbils into existance.

:Starting Point:
The Treasury has $1,000 dollars in its account at the Fed.
The Banks have $500 dollars in their checking accounts at the Fed.
The Fed declares that its target interest rate is 10%.

1.
The Treasury offers a 1 year note with a $100 face value and a $10 coupon.
The banks know that they can sell this to the Fed whenever they want for $100 because of the Fed's interest rate policy.
The banks buy the bonds for $99.999999999 and sell to the Fed for $100 a small profit (hardly material because of the extreme amounts of competition).

2.
Now the Treasury has $1,099.999999 in its account.
The Banks have $500.0000000001 in their account. In the grand scheme of things, this did not make a material impact on their balance sheets.

3.
Next the Treasury decides to spend some money, and for simplicity sake they decide to sell proceeds from the bond auction.
Treasury spends the $99.9999999999. It ends up in the Banks.
Now the Banks have $600 dollars in their account.

At step 2, we have brand new $100, distributed as follows:
$99.999999 at the treasury account and $0.0000000001 at the banks account.
The FED has the new $100 face value T note

At step 3 this new $99.999999 will end up with the private sector when its payed as salary or whatever.

To me this illustrates four things.
1- The treasury bank account will never be negative since they can spend the proceeds from treasury notes.
2- The treasury can spend at will any time it wants to.
3- The auctions will never fail since it gives the banks tiny profit as incentive.
4- The 100 T notes is a liability on the treasury and these liabilities can continue for ever i.e the other side of our base money which is this debt

Lone Wolf wrote:

moda0306 wrote: I'll round out this short post by saying that if Entity A is a currency user, and Entity B is a currency issuer, but Entity B is really beholden to Entity A, then I'd consider both Entity A and Entity B issuers of currency

"Beholden" is quite vague.  If you can, try to be very specific in what you mean on this one.

I'd say that entity A is a currency issuer if and only if they have the ability to create money out of thin air (setting aside coins, bills, etc.)  As the Treasury is only able to tax the private sector or borrow from the private sector, they possess no means by which they can create money out of thin air.

Yes, the Fed sets up auctions so that there will always be some buyer for US debt.  What the Fed does not do is grant the Treasury direct access to the printing press.  Even the bills that the Treasury prints are under the care of the Federal Reserve.  That's what an independent Central Bank is all about.

moda0306 wrote:The government has arranged it, clumsily, to mimmick a system where the government as a whole is a money-issuing entity, not just an independent fed.

The entity that issues the currency (essentially, the Fed) and the entity that uses the currency (the Treasury) are independent from one another.  There is no legal way for the Treasury to access the Fed's electronic printing press to replenish its account and such a thing has never been done before.

So long as the Treasury obtains all revenue exclusively via either taxation or borrowing money, this separation matters very, very much.

moda0306 wrote:The problem, LW, is that it seems like you're trying to look at certain "functional realities" of the system that have been around since the gold standard, while downplaying others that tend to completely transform the power structure of the money-issuance process.

Apart from the fact that Treasury auctions to the private sector are rigged to avoid catastrophic failure, tell me specifically which "transformative realities" aren't getting their due?  If you show me one that rivals the ability to create money out of thin air (exclusive to the Fed) you'll have my full attention!

The reality is that we (and all major industrialized nations) have an independent Central Bank.  Chartalism/MMT/MMR has no model for this and thus IMO is not a useful way to look at our system as it actually exists.  It perpetuates way too many misunderstandings (many of which we've worked through in the course of this thread -- see the list above.)

LW,

My example highlighted that the Treasury has access to the Fed's money creation through bond issuance and subsequent purchase by the fed.

Did you read it?

All of the Fed's profits go back to the Treasury at the end of the year. The money creation results from the two acting as a team. They are basically the same entity, and they interface with each other through primary dealers. I think this interface is what is confusing you, but it is basically just a subsidy to the banks engaged in it because of the arbitrage opportunity. They hardly call the shots, they are just a middle man taking a tiny profit. They are not necessary at all, and in Japan the CB can buy bonds directly from their treasury.

moda0306 wrote: I believe that the treasury actually has authority over the fed, statutorily, in a piece once posted by Gumby.

Here it is:

FEDERAL RESERVE ACT

Section 10

6. Reservation of Powers of Secretary of Treasury

Nothing in this Act contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.

Source: http://www.federalreserve.gov/aboutthef ... n%2010.htm

It couldn't be more clear. And this makes sense since Congress controls the Treasury.

moda0306 wrote: Peace... and you're still wrong about WWII and the depression so there!!  Jk... Let's keep this one on MMT.

Of course!  ;)

Lngtermer wrote: It just did LW. The new $100 came about because they took on a liability i.e issued the 100Tbils into existance.

What new $100 do you mean?  The new T-bill?  The purchasing bank gave the Treasury $100 in cash for a freshly-issued T-bill.  The Treasury receives the $100 from the bank, gives the bank the T-bill as an asset and takes on the liability of paying the T-bill back via either taxation or future borrowing from the private sector.

If this in itself fits the definition of "spending money into existence" then any entity which issues a bond would fit as well.  No new money -- just a new asset mirrored by a new liability.  This is the shape that all loans take.

New money comes into existence when and only when the Federal Reserve conjures it out of thin air.

Lngtermer wrote:At step 2, we have brand new $100, distributed as follows:
$99.999999 at the treasury account and $0.0000000001 at the banks account.
The FED has the new $100 face value T note

Correct -- the Federal Reserve printed money out of thin air in order to purchase this T-bill from the bank.  But this ability is unique to our independent Central Bank which buys or sells Treasuries in order to meet their interest rate and/or monetary targets.

melveyr wrote: The money creation results from the two acting as a team. They are basically the same entity, and they interface with each other through primary dealers. I think this interface is what is confusing you, but it is basically just a subsidy to the banks engaged in it because of the arbitrage opportunity.

I understand the mechanisms you're describing but I disagree with this picture of naked, coordinated debt monetization.  Baked into what you're saying is the assumption that the Treasury can order the Fed to, at will, immediately and permanently monetize any amount of debt that it wishes for it to.  I get that this is what Chartalism prescribes but it's not how the arrangement works in the United States (or at least is not how it's supposed to work.)  These sorts of coordinated shenanigans are not part of the Fed's mandate.

I think our disagreement on this particular subject comes down to one thing -- whether the Central Bank's independence means anything at all in practice.  The conventional model assumes that Central Banks are more or less independent while your Chartalist model assumes that Central Banks act at all times as "handmaiden to the Treasury".  Fair statement?

Gumby wrote: Nothing in this Act contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.

It looks to me like all this does is protect the Treasury from the Fed encroaching on its powers.  I'm not seeing the clause where the Treasury gets to boss the Fed around.  IANAL but looks like some simple firewalling to me.

The government's liability is the private sector's asset. Get it?

from: Lngtermer on Today at 10:17:14 AM
It just did LW. The new $100 came about because they took on a liability i.e issued the 100Tbils into existance.

What new $100 do you mean?  The new T-bill?  The purchasing bank gave the Treasury $100 in cash for a freshly-issued T-bill.  The Treasury receives the $100 from the bank, gives the bank the T-bill as an asset and takes on the liability of paying the T-bill back via either taxation or future borrowing from the private sector.

If this in itself fits the definition of "spending money into existence" then any entity which issues a bond would fit as well.  No new money -- just a new asset mirrored by a new liability.  This is the shape that all loans take.

New money comes into existence when and only when the Federal Reserve conjures it out of thin air.

Good point LW, but it seems to me the 100 Tbills is an implicit $100.
The banks it seems can either hold on to the 100 Tbills and leveraged and therefore lend money to the consumers
or they can go ahead and exchange it for a brand new $100 from the FED.

As far as the private sector concerned there is an asset worth $100 does not matter if dollars or bonds its all the same.

This is in mind a form of spending a $100 into existence by the treasury. Wouldn't you say?

The FED cannot do any thing until the treasury issues the note.
And yes, weather the banks go and exchange it or not the treasury is left with the $100 liability which a representation of this new money.

Edit:
I am still trying to undertand this so here is a small clarification 
When the banks give the treasury the $100 they exchanged it with an asset of same value so no net change in the private sector.
But, that changes when the treasury spends that $100. So, the T-bill is the real printing of the money it seems.

Lone Wolf wrote: Yes, the Fed sets up auctions so that there will always be some buyer for US debt.  What the Fed does not do is grant the Treasury direct access to the printing press.  Even the bills that the Treasury prints are under the care of the Federal Reserve.  That's what an independent Central Bank is all about.

You don't need to have access to a "printing press" to create or spend money into existance.  All it takes is the flick of a legal pen to do so and Congress does thus.  Money is just a metaphysical imprint on the symbolic culture.  Under our system of government, the power to emit "bills of credit" is forbidden to the states and is reserved to Congress.  Thus, fiscal policy determines our ever expanding debt-as-money supply, or "net financial assets" as the MMR types put it.

That the Fed can create new, internal "base money" is not the same thing as a "printing press" in popular conspiracy parlance or Bernanke dropping dollar bills from a helicopter.  Even so, the "monetary base" is an insignificant pimple on the ass of the total economic elephant juggernaut, which consists of Treasury instruments, Federal Reserve Notes, private credit and private money.

The Fed is long past its heyday if all the conspiracy allegations were ever true.

Paper money is a form of currency that is physically printed by the Bureau of Engraving and Printing, under authority of the Federal Reserve System. The Bureau of Engraving and Printing is part of the U.S. Treasury Department, whereas the Federal Reserve is not. In contrast to paper money, coins are physically produced by the U.S. Mint, within and under authority of the U.S. Treasury. The Federal Reserve System can authorize as much paper money as it sees fit, but the U.S. Treasury is restricted by law to a certain maximum amount of coinage in circulation.

The Federal Reserve System can increase the money supply by creating money to purchase U.S. Government securities on the open market. Those "open market operations" involve the buying and selling of U.S. government securities, including federal agency securities and also (in response to recent economic turmoil) mortgage-backed securities. Federal agency securities have been issued by the federal government to finance deficit spending. Article I, Section 8 of the Constitution explicitly contemplates U.S. Government "securities."

The Federal Reserve System can also increase the money supply by allowing banks to issue more loans, which is accomplished by reducing the reserve requirement ratio. This regulation of banks is pursuant to the Commerce Clause.

Conversely, the Federal Reserve System can reduce the money supply by selling securities or by increasing the reserve requirement ratio.

Looks like they forgot about the discount window.  After all, that was the main selling point of the Fed in the public consciousness.

MG

LW,

I think our disagreement on this particular subject comes down to one thing -- whether the Central Bank's independence means anything at all in practice.  The conventional model assumes that Central Banks are more or less independent while your Chartalist model assumes that Central Banks act at all times as "handmaiden to the Treasury".  Fair statement?

I won't speak for everyone else, but, yes... this is really what it comes down to, IMO.  Thank God for MT coming in and taking our knives off of each others throats... now it's just boots to necks.  

To one of your other points, nobody has to "order" the fed to do anything... it's their job to ensure the stability of the payments system.  The treasury will "borrow money" when its irrelevant account gets low, and the fed & the member banks organize them to work.  I know I have to get you more meat on this but this isn't an auction like at your great uncle's estate.  The member banks have to participate... The base dollars to participate with exist within the banking system, just as they always would, and the banks would always rather collect some interest than no interest.... however, I owe you more than this (though letting Gumby run with it has worked well in the past )

I guess I'd also ask you that if taxation is a funding mechanism, not a "value stimulator," what is it that gives our currency value?  Simply legal tender laws?

Does the Japan experience validate any part of MMT in the eyes of anyone?

It seems to me that anything but MMT would have predicted that Japanese interest rates would have started rising at some point once it became clear that the government's debt load was unlikely to ever be repaid without some kind of currency devaluation.

MediumTex wrote: Does the Japan experience validate any part of MMT in the eyes of anyone?

It seems to me that anything but MMT would have predicted that Japanese interest rates would have started rising at some point once it became clear that the government's debt load was unlikely to ever be repaid without some kind of currency devaluation.

There might be two confounding variables: the high domestic savings rate via their Post Office savings plan and that of the carry trade (any potential inflation would be exported).

MG

From pragcap:

The issuance of government bonds is merely a monetary tool that helps the Federal Reserve to control the overnight rate. It is not a fiscal financing tool. To understand this point we can review government bond auctions in the USA.  These auctions are carefully orchestrated events that are designed not to fail – that’s why they never do. The NY Fed describes the way in which their operations are intricately intertwined with the US Treasury:

“Staff on the Desk start each workday by gathering information about the market’s activities from a number of sources. The Fed’s traders discuss with the primary dealers how the day might unfold in the securities market and how the dealers’ task of financing their securities positions is progressing. Desk staff also talk with the large banks about their reserve needs and the banks’ plans for meeting them and with fed funds brokers about activities in that market.

Reserve forecasters at the New York Fed and at the Board of Governors in Washington, D.C., compile data on bank reserves for the previous day and make projections of factors that could affect reserves for future days. The staff also receives information from the Treasury about its balance at the Federal Reserve and assists the Treasury in managing this balance and Treasury accounts at commercial banks.

Following the discussion with the Treasury, forecasts of reserves are completed. Then, after reviewing all of the information gathered from the various sources, Desk staff develop a plan of action for the day.”?11

So let’s connect the dots here. Treasury auctions bills, notes and bonds to “finance”? its spending. It announces these auctions periodically. In the case of bills it announces the auction each week on Monday and the bills are auctioned that Tuesday. This is due to a Congressional mandate because our politicians believe we must finance all of our spending via bond auctions – a myth that has persisted since moving off the gold standard.

What’s important to note here, however, is that Treasury and the Fed are working in partnership to track deposits and maintain a record of reserves in the system (Fed and Treasury are essentially the same entity as far as operations are concerned – the myth of Fed independence creates substantial confusion here). William McChesney Martin, the longest ever serving Chairman of the Fed has actually said as much:

“There was a very real point . . .that the primary direction must come from the Treasury and that anything done by the Federal Reserve must be coordinated with the Treasury.“12

The whole myth of “Fed independence”? generates a great deal of confusion. Make no mistake, the Fed is not an independent entity. They pass close to 100% of their profits on to the US Treasury and work in close coordination with the government in everything they do. The myth of independence is intended to create the perception of no political bias. But do not be fooled – the Fed is very much a part of the US government.  They might maintain their political independence, but they are very much a part of the US government.

Lone Wolf wrote:What the Fed does not do is grant the Treasury direct access to the printing press.

LW, you're going to hate me for bringing this up, but US Code Title 31, Subtitle IV, Chapter 51, Subchapter II, § 5112 (k) specifically says:

"The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time."

Source: 31 USC § 5112 - DENOMINATIONS, SPECIFICATIONS, AND DESIGN OF COINS

It's a very interesting law because everything else under that entire Chapter is very specific about the weight, size, markings, denominations and compositions of the coins that are minted by the Treasury. But, some lawmakers went through a lot of trouble to make every aspect of platinum coin seignorage at the full discretion of the Secretary of the Treasury.

In other words... if the US Treasury needed $50 quadrillion dollars in its Treasury account by tomorrow morning, all it needs to do is mint a single debt-free $50 quadrillion dollar coin, walk it over to the Fed and deposit it into their account. This would give the Treasury the ability to spend $50 quadrillion dollars in base money with no strings attached and no debt.

So yes... The Treasury can create debt-free base money out of platinum if it wants to. Lawmakers wrote an escape hatch that grants the Treasury all the power it needs to spend money it doesn't have.

Of course... The platinum coin!!  How did we get this far into this epic squabble before that was brought up.

Check and mate.

Gumby wrote:
So, anyway, when I pay my taxes, the money leaves the private sector. Yes, it's often spent again, but the main point is that only the Treasury has the ability to create or destroy net financial assets in the private sector. The Fed can't do that — particularly since it is usually swapping out Treasury debt or other forms of private credit when it creates base money. The Fed needs Treasury debt to make its monetary engine run without crossing the line into fiscal spending (which people have criticized it for and Bernanke has actually tried to stop).

If this is the case what do you make of the ~$847 billion in mortgage backed securities on the fed's balance sheet, as well as the ~$30 billion "toxic" debt that it holds in the Maiden Lane and TALF companies and the $28 billion in central bank liquidity swaps?

Fed balance sheet:  http://www.federalreserve.gov/releases/ ... nt/h41.htm

You know, I've sort of lost track of what we're debating here with regards to the fed, etc.  What exactly are we trying to figure out?  Maybe we need a fresh thread where someone makes some sort of an assertion at the beginning and then we debate the merits of that assertion.  I'm trying to think of the most basic level where we could start, and then build our understanding together from there.  We all have a lot of preconceived notions about a lot of different things here, and sometimes it's hard, especially in this format, to drill down to the basic assumptions and start there.  If we don't agree on the basic assumptions, we can debate all day long and get nowhere (which we are doing).  If I think of a good way to start such a thread, I'll start it; if I don't have one started, anyone feel free to do so.

hoost wrote: assumptions and start there.  If we don't agree on the basic assumptions, we can debate all day long and get nowhere (which we are doing).  If I think of a good way to start such a thread, I'll start it; if I don't have one started, anyone feel free to do so.

LW thinks the Fed is independent and has the power to create the money supply that we all use, i.e. monetary policy causes inflation.  He believes for the govenrment to first spend anything, it must first borrow from the private sector (or have the Fed "monetize the debt").

MMR says that the Fed is just an accounting gimmick and that Congress determines the money supply via authorized spending, i.e. fiscal policy causes inflation.  No need to first borrow from the private sector as that is an anarchronism left over from the so-called gold standard era.

In actual practice, MMR is correct but their nasty habit of oversimplying real world operational and accounting realities turning it too much into a school of thought, leaving it vulnerable to attack by other schools of thought.  There's also too much of a cult of gurus involved casting their personal sheen because only a handful, if any, economists subscribe to MMR tenants, so its not going through the academic peer review/literature process.

MG

Good idea, hoost!  It is probably helpful to post an "inventory" of what we've agreed on and where we still disagree.  As suggested by Medium Tex, I posted one of these a while back.

Current points of agreement as of a page or two ago:

• The Treasury has an account at the Fed through which all spending and revenue flows.
• The balance of the Treasury's account must always stay positive and (thus far) always has.  Revenue precedes spending.
• The account going negative would be such an apocalyptic event that extreme Fed intervention of some kind would be very likely.  We do not want to find out what this looks like.
• The Treasury's account can only be replenished via taxation and borrowing, not direct printing.  Thus spending is always balanced or exceeded by total taxation and borrowing from the private sector.
• Rather than spend new money into existence a la the Fed, the Treasury creates new financial assets (bonds) that it sells to the private sector.  (More on where we differ here in a moment.)
• The great majority of our base money was created via Fed purchases of Treasury debt.  The Fed owns other securities such as morgage-backed securities (booo!), gold, and foreign currencies but these are minority players.  (We of course set aside coins, bills, etc.)

I think we've distilled things down to where we don't line up (some text gratefully stolen from MG).

• LW thinks the Fed is independent and has the power to create the money supply that we all use.  MMR says that the Fed is just an accounting gimmick and that Congress determines the money supply via authorized spending.
• LW thinks that because MMR models so little of the first list that it obfuscates and waves its hands about the real workings of our US system.  MMR says that it is correctly modeling the net effects of our system and that much of the first list is just gold standard cruft.
• LW thinks that the MMR $50 quadrillion coin idea is a banana republic, vomit-inducing abomination that would require the Fed to willingly surrender its independence.  MMR says LW is just being a weak-kneed sound money nancyboy who can't recognize an idea whose time has come. 

I'm comfortable "agreeing to disagree" on the above points.