Gyroscopic Investing

I'm impressed that Browne understood that.  But to paraphrase Nixon, "We are all Monetarists now."

MG

Gumby wrote: Even Harry Browne has said on his radio show, on many occasions, that inflation is not simply about the quantity of the money supply, but rather the demand for money (from banks/deposits).

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

moda0306 wrote: What I'm saying is that when the gov't prints dollars to buy back the bonds, it's actually ripping up one form of a person's savings to give them another.

This is a great description of QE.  However, the "trillion dollar platinum coin" scheme isn't QE.  With QE, the Treasury still ultimately pays off the bond (borrowing or taxing whatever money is necessary to do so.)  The bonds are on the Fed's balance sheet and can be sold back to the public before they reach maturity.  The Fed creates dollars to purchase those bonds and destroys those dollars when the bond is sold.  So long as we're not sweating the small stuff, you can see how this balances out.

The coin thing is a different beast.  IIRC, you have an accounting background.  Here's how I see it from an extremely simplified accounting perspective.  See what you think.

Before:
Treasury has $0 assets and $15T in liabilities (T-bills owned by Lone Wolf.)
Lone Wolf has $15T in assets because he holds $15T in T-bills (appropriately balanced to 25% within my PP, of course!)  $0 liabilities.
Federal Reserve has $0 assets and $0 liabilities.

Total: $15T in assets, $15T in liabilities.  Net: $0.

Now the Treasury mints these fantasy platinum coins and sells them to the Fed.  I am assuming that these things are indeed legal tender and the Fed can divest itself of them if it wished to do so.  Perhaps at the world's biggest change machine.

The Treasury uses the $15T in cash it gets from the Fed in order to buy up all of my T-bills, canceling the national debt.  Now we've got:

After:
Treasury has $0T in assets and $0T liabilities.
Long Wolf has $15T in assets (Federal Reserve Notes) and $0 liabilities.
Fed has $15T in assets and $15T in liabilities.

Total: $30T in assets, $15T in liabilities.  Net: +$15T.

^^^ That looks like severe monetary inflation to me.

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.

"Even" Friedman was a monetarist?  He's like the OG of Monetarists!    He more or less founded Monetarism.

And yes, he said that if the Fed had kept the money supply stable that the Depression would have been much less severe.  He didn't believe that this was a problem with the gold standard per se but more down to inexperience on the part of the Fed in not understanding monetary targets.

stone wrote: moda, your example of burning the houses as a hypothetical way to get hyperinflation is I guess very close to real historical examples of hyperinflation. Zimbabwe, 1920s Germany, 1990s Serbia etc all entailed real stuff going to waste on a colossal scale before that kicked off the hyperinflation.

Destruction of real assets certainly helps but IMO it's not a necessary precondition.  Just the general situation of way too much money chasing too few goods is all it seems to take.

With Weimar it wasn't really about destruction per se but more just about trying to pay for reparations that it simply could not afford.  The government did not have enough purchasing power of its own to acquire enough gold for the required reparation payments.  As a "solution", it ran the printing presses until all of the debts were paid.

Essentially, they just absconded with as much of their citizens' purchasing power as it took to pay their bills.  The citizens of Weimar suffered accordingly.

Wasn't it Milton Friedman who advised the Bank of Japan to conduct QE as he (wrongly it turns out) believed that increasing the monetary base would reduce deflation in Japan? Milton Friedman believed that the turn over rate (velocity) of base money was fairly constant and so increasing the amount of monetary base would feed through into CPI. It looks more like velocity drops to offset any such increased stock of monetary base.
http://pragcap.com/milton-friedman-misu ... ive-easing

“The surest road to a healthy economic recovery is to increase the rate of monetary growth, to shift from tight money to easier money, to a rate of monetary growth closer to that which prevailed in the golden 1980s but without again overdoing it. That would make much-needed financial and economic reforms far easier to achieve.

Defenders of the Bank of Japan will say, “How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”?

The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.”?

LW,

It's a Friday... and despite being an accountant this asset/liability stuff in terms of federal reserve accounting becomes so confusing to me after a few steps sometimes that I'm going to give up for the day and let Gumby retort.

Regarding your post on Weimar... I think that's a very accurate description, but I'd point out that it was true debts...a promise to deliver actual, not fiat (in a currency it could control), value... that made it go hyperinflation.

I'd also add that it appears there were certain production issues when much of its productive region went under French control for a period.

But yes, if you combine a fiat currency with true liabilities and hardships (promises to pay value out of your control, war, regime change, massive corruption, other forms of destruction of the means of production) you can very well suffer BAD inflation.

Why not just charge negative interest on reserves?

It seems to me this would acheive what near-zero rates aren't.

Lone Wolf, isn't it true that the initial Weimar printing up just caused a stock market bubble? Only when a general strike caused a collapse in supply of essentials did things get truely horrible- only then did the hyperinflation take off.
AFAIK the only example of what could be called hyperinflation that did not have a massive supply destruction as a pre-condition is Brazil in the 1990s. It was less of a horror story than normal hyperinflations I guess. The Brazil example was perhaps a different type of economic condition. Perhaps it should be called "index linking hyperinflation" so as to distinguish it from classic supply crash hyperinflation such as in Weimar, Zimbawe, Serbia etc.

moda0306 wrote: Why not just charge negative interest on reserves?

It seems to me this would acheive what near-zero rates aren't.

I'd say that negative rates on reserves would need to be extended to being a shift of the tax burden to being all of the tax being in the form of a flat asset tax. Here I go again

Lone Wolf, I think all of this has at its heart the MMT idea that government debt is in reality destined to be expanded indefinately and never paid down (unlike what US president Andrew Jackson did). Also QE is never going to be reversed by the Fed. The Fed can pay interest it receives and money from when bonds mature back to the treasury but in reality it has been using them to buy more bonds I thought.

If you accept that the Fed is a "black hole" for bonds, then doesn't that make QE look more like the platinum coin trick?

I'm on vacation at the moment, so I'll have more time next week to discuss this. But I'm curious if LW still thinks that Treasuries are somehow illiquid to the point of preventing someone from spending anymore than if they had the same amount of money in cash. Treasury Money Market funds, by definition, disprove any argument that someone is restrained from spending if they invest in Treasuries.

So, if LW understood that Treasuries are liquid enough to be the equivalent of cash (and this shouldn't be that much of a stretch since HB recommended keeping cash as Treasuries) then there is no reason why he should fear the government replacing Treasuries with the dollars. People wouldn't stop saving just because their savings were just dollars in a bank savings account.

Here's an idea MMTers have floated on how we could eliminate the Federal debt. Instead of converting trillions of dollars in Treasuries into dollars instantly, which is pretty unrealistic, suppose the government just gradually stopped issuing longer term bonds and slowly (over a period of 30 years) just let all of the Treasuries mature. And as all of the Treasury bonds matured, the government moved from short term Treasuries to only issuing Savings Bonds or overnight Government CDs. During business hours, your money would be cash in a savings account (or just as liquid) and while you were sleeping your money would be a government CD or Savings Bond. The Treasury would simply spend money on whatever Congress approved in its budget, worrying only about inflation/deflation and how best to spend its budget. Government bonds don't "fund" anything anyway, so we might as well just let them mature and replace with another form of savings.

Gumby, do you think banks have greater capacity to conduct commodity trading if they hold "high powered money" in place of treasuries?

Gumby,

100% agree.  Treasuries are a financial asset, just like dollars, that while they appear to be locked up forms of savings, are really just another asset on one's balance sheet that one could trade for real economic value.

I can trade $1,000 for a generator.

I can trade my old car for a generator.

I can trade my services as an accountant for a generator.

I can trade my $1,000 in T-bills earning .1% for a generator.

The first and last are both very liquid forms of money.  Both are mediums of exchange that are both very efficient and almost the same exact thing.

If on the 31st my salary direct deposit showed up as T-Bills in my TD account instead of cash in my bank account, I'd probablywonder wtf happened, but I'd feel no poorer as a result.  They're almost identical instruments.  One is a piece of green paper printed out of nowhere that stores about 97%-99% of its value after a year, and the other is a "blue" piece of paper printed out of nowhere that stores about 97%-99% of its value after a year and pays .1% interest over that same period.

Both could very easily become money in a society... the reason people store EITHER ONE today is a desire to save, not to even really collect interest, and DEFINITELY not to make sure certain parties are holding off on consumption.

stone wrote: If you accept that the Fed is a "black hole" for bonds, then doesn't that make QE look more like the platinum coin trick?

I don't.  The reason is that with QE, the Fed is taking an asset (an LT bond) out of circulation but putting in a shorter-term asset (dollars.)  With the platinum coin (trick? abomination?), the Treasury adds a brand-new asset without erasing any corresponding liability.

That's what I was trying to express with my accounting identity above.

Gumby wrote: I'm on vacation at the moment, so I'll have more time next week to discuss this. But I'm curious if LW still thinks that Treasuries are somehow illiquid to the point of preventing someone from spending anymore than if they had the same amount of money in cash.

And I am curious whether you still believe that we can print up the entire national debt without causing any inflation.    If so, bring on the free lunch!

Anyhow, I agree with you, this was very poorly phrased on my part.  What I was trying to get at is that T-bills, while extremely liquid, are still liabilities of the Treasury (IOU's.)  When their time's up, their issuer (Treasury) must cough up a dollar (aka trade $1 of their assets to you in order to erase this $1 of liability.)  If you were ever to erase a liability of the Treasury without erasing a corresponding asset, it's inflation.

This is more clearly expressed with my accounting example.  See what you think.

moda, if you are deciding what level to conduct commodity trading at, then isn't your own (and the markets) instantly available liquidity the only thing that sets the size?

Might that be where the distinction between thirty day treasuries and bank reserves becomes relavent?

Lone Wolf, saying that bonds (assets) have a linked liability on a net macro scale is only ever true if you believe that the stock of bonds isn't going to just increase for ever. MMTers do believe that the government debt is going to increase for ever and ever. So given that belief, in effect there is no meaningfull liability.

stone,

I agree with you that maybe the excess reserves result in more speculative investing... I wouldn't think it would necessarily be commodities though... in fact the purpose of QE is to have banks invest in other things like business loans, mortgages, stocks, etc... commodities probably get thrown in there too.

LW,

How is that treasury bond any more of a real liability than the dollar when it was originally printed?

If step one is initially printing an unbacked dollar into existence in the first place, and only then can you issue a treasury to suck it back up, it would seem that both are only a liability to the extent that you need a military/IRS/courts to back up your clout to collect taxes.


Big Question:

If the only way the the fed can print dollars is to buy bonds that dollars were used to buy in the first place, then how do they ever truly increase the money supply?

Lone Wolf wrote:

Gumby wrote: I'm on vacation at the moment, so I'll have more time next week to discuss this. But I'm curious if LW still thinks that Treasuries are somehow illiquid to the point of preventing someone from spending anymore than if they had the same amount of money in cash.

And I am curious whether you still believe that we can print up the entire national debt without causing any inflation.    If so, bring on the free lunch!

Lunch is served. If we monetize the debt — replacing Treasuries with dollars — there will be no new net financial assets added to the private sector. Without any new net financial assets in the private sector, you can't have inflation. it's that simple.

Gumby wrote: Lunch is served. If we monetize the debt — replacing Treasuries with dollars — there will be no new net financial assets added to the private sector. Without any new net financial assets in the private sector, you can't have inflation. it's that simple.

You're talking about QE.  I'm not talking about QE.  If you do QE, the national debt still exists.  It still has to be serviced and ultimately paid off but it's just all on the Fed's balance sheet now.

I mean your $15T in platinum coin trick, a la:

Lone Wolf wrote: Before:
Treasury has $0 assets and $15T in liabilities (T-bills owned by Lone Wolf.)
Lone Wolf has $15T in assets because he holds $15T in T-bills (appropriately balanced to 25% within my PP, of course!)  $0 liabilities.
Federal Reserve has $0 assets and $0 liabilities.

Total: $15T in assets, $15T in liabilities.  Net: $0.

Now the Treasury mints these fantasy platinum coins and sells them to the Fed.  I am assuming that these things are indeed legal tender and the Fed can divest itself of them if it wished to do so.  Perhaps at the world's biggest change machine.

The Treasury uses the $15T in cash it gets from the Fed in order to buy up all of my T-bills, canceling the national debt.  Now we've got:

After:
Treasury has $0T in assets and $0T liabilities.
Long Wolf has $15T in assets (Federal Reserve Notes) and $0 liabilities.
Fed has $15T in assets and $15T in liabilities.

Total: $30T in assets, $15T in liabilities.  Net: +$15T.

^^^ That looks like severe monetary inflation to me.

How do you create $15T in new assets without creating inflation?

LW, Dollars are liabilities of the Fed. That's why they call them Federal Reserve Notes.

According to Wikipedia, "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 Bank and obligations of the United States"

Lone Wolf wrote: You're talking about QE.  I'm not talking about QE.  If you do QE, the national debt still exists.  It still has to be serviced and ultimately paid off but it's just all on the Fed's balance sheet now.

Absolutely incorrect. By law, all interest accrued by Treasuries on the Fed's balance sheet is returned to the Treasury. The Treasury would be paying itself interest. It would have no trouble doing this because it wouldn't have to do anything.

Besides, the government could just stop issuing Treasuries, as I explained above, and let them all gradually mature. Monetize the debt over the next 30 years and get rid of these ridiculous bonds that don't fund anything.

Gumby wrote: According to Wikipedia, "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 Bank and obligations of the United States"

Right, a liability backed by some asset.  I've noted that in my "accounting" example above.  If you see an error in the accounting I've got there, let me know.

Gumby wrote: Absolutely incorrect. By law, all interest accrued by Treasuries on the Fed's balance sheet is returned to the Treasury. The Treasury would be paying itself interest. It would have no trouble doing this because it wouldn't have to do anything.

Besides, the government could just stop issuing Treasuries, as I explained above, and let them all gradually mature. Monetize the debt over the next 30 years and get rid of these ridiculous bonds that don't fund anything.

No, you're forgetting the most important part (particularly in these low-rate environments) -- the principal on the bond.  That still has to be paid back to the Fed.  That's how you can have QE without the mega-inflation that would be unleashed by your coin idea.  QE defrays the Treasury's interest liability but not the Treasury's principal liability.

If there's something wrong with any assumption I'm making, it ought to show up in my accounting identity.  If you see it, hit me with it.

stone wrote: Gumby, do you think banks have greater capacity to conduct commodity trading if they hold "high powered money" in place of treasuries?

No, it shouldn't make a difference since no net financial assets are added to their balance sheet. But whether or not Primary Dealers and speculators go hog wild during large QE-like transactions is a different story. If we got rid of Treasuries, I don't think we would need any Primary Dealers, so it's a non issue if Treasuries were to go away.

Lone Wolf wrote: Right, a liability backed by some asset.  I've noted that in my "accounting" example above.  If you see an error in the accounting I've got there, let me know.

Wait a minute... we're dealing with a fiat currency here... dollars are backed by bonds when the fed enacts QE, but the bonds were given out for printed dollars.

This is where I think we're getting into a catch 22... If the only time the fed can print money is to buy a bond, and that bond was bought with printed money, how did any of the money ever come into existance (post gold standard)?

moda0306 wrote: stone,

I agree with you that maybe the excess reserves result in more speculative investing... I wouldn't think it would necessarily be commodities though... in fact the purpose of QE is to have banks invest in other things like business loans, mortgages, stocks, etc... commodities probably get thrown in there too.

I think there is a huge difference between making business loans and commodity trading. Business loans require very very little liquidity. There was already ample liquidity for any business loans. By contrast trading commodities has a seemingly inexhaustible capacity for gobbling up liquidity. The advantage of trading commodities  rather than stocks is that no one ever NEEDS to buy stocks. People only buy stocks when the price is right. Commodities must be bought whatever the price. Price spikes allow the speculators to harvest the real economy.

Gumby, I'm not sure that the platinum coin trick would stop there from being no new net financial assets. Deficit spending with base money with no debt attached would still create more net financial assets but in the form of base money.

Lone Wolf, the problem with your accounting IMO is that you do not recognise that the stock of government debt always increases. New NET (note NET NET NET ) financial assets are what the MMTers are on about. They are talking macroeconomics. They only care that overal the NET amounts of bonds etc are increasing.  If bonds as a whole were to be paid down in the future then they would be behaving as you and not as the MMTers describe.