Correlations

[Mdraf]

If I gave you a piece of paper saying you could redeem it for 100 Facebook "likes" from me next week, would you be worried about my ability to make good on my promise?  What if it was for 1000 "likes"?  Would it matter?

If it were for 1,000,000,000,000 likes I wouldn't believe you

[Mdraf]

I agree that it is not identical, but it is pretty darn close.  Though, I suppose it depends on your definition of "identical".

Can you take the T-Bond to the grocery store and ask them to make change?

That's what a medium of exchange means. It has a defined immediate universally accepted value.

[Gumby]

Gumby, as I said in the discussion last week, it is the certainty that the Fed will buy the gov paper (at zero interest)  that enables it (the Treasury) to issue it in the first place.

And as I explained, the Primary Dealers are required to purchase the Treasuries regardless of whether the Fed is buying them or not. In fact, there are situations where the Fed might want to sell Treasuries to Primary Dealers, while the Primary Dealers are buying Treasuries at auctions — if the Fed ever wanted to decrease reserves for some reason — so that argument makes no sense from the very fact that POMO can go in both directions.

Secondly, the Primary Dealers want to buy Treasuries because they would rather hold Treasuries than keep excess reserves (from all that deficit spending) as cash. That's the whole point of Treasuries. That's why Primary Dealers elect to be Primary Dealers!

Let's see if we can set some stipulations in our debate. That way we don't keep going back to square one.  Do you agree with the following generic statements ?:

1) As the volume of credit rises, the creditworthiness of the issuer declines

True for a currency user. Not true for a currency issuer. (It would be like saying that a scorekeeper runs the risk of issuing too many points at a football game).

2) A T-bond (an IOU) is not identical to cash (medium of exchange)

Not true. If you and I both keep all our money in a Treasury Money Market Fund, I can write you a check or wire that money from my Treasury Money Market Fund and you can deposit it in your Treasury Money Market Fund. The entire transaction transaction would take a nanosecond. Treasuries are no less liquid than a savings account (which makes sense since most savings accounts are invested in Treasuries!)

The very fact that the "cash" portion of the Permanent Portfolio is held in "Treasuries" alone proves that Treasuries are as good as cash.

[Gumby]

Can you take the T-Bond to the grocery store and ask them to make change?

That's what a medium of exchange means. It has a defined immediate universally accepted value.

Sure I can. I can write a check from my Treasury Money Market Fund and give it to the cashier. It's no different from using a debt card that withdraws funds from your Savings Account (which is also invested in Treasuries).

[Mdraf]

Can you take the T-Bond to the grocery store and ask them to make change?

That's what a medium of exchange means. It has a defined immediate universally accepted value.

Sure I can. I can write a check from my Treasury Money Market Fund and give it to the cashier. It's no different from using a debt card that withdraws funds from your Savings Account (which is also invested in Treasuries).

No you are using the bank on which you are drawing the check as the intermediary to convert the bonds into cash.  Same with the credit card. You have a third party in the transaction. As to whether the grocery store will accept your check or not is another matter.

[MediumTex]

Can we do a refresh on what exactly we are disagreeing about?

However dumb the current arrangement may be for financing debt the of the federal government, it has gone on now for several decades with the Fed mostly hitting its inflation targets in the low single digits.

Everything has been pretty orderly, and interest rates have dropped...and dropped...and dropped, even as the debt and deficits of the U.S. government have gotten worse...and worse...and worse.

And one more time, I will say look at Japan if you think that this sort of arrangement can't go on...and on...and on.

When you're dealing with abstractions like points on a scoreboard, unicorn migratory patterns, or the number of angels that can dance on the head of a pin, it doesn't really matter what the quantities are--it's just a mental exercise with no real connection to the world of real things.  The monetary system is like that, with the single constraint of inflation, and when inflation does show up policymakers would be wise to take it seriously.

But until the inflation shows up, I don't know what there is to be upset about, and if you have protected yourself against the contingency of inflation by owning gold, it seems like you should be able to tune out this whole topic in the same way that you might tune out Britney Spears when she sings or Barbra Streisand when she talks politics.

[Mdraf]

True for a currency user. Not true for a currency issuer.

Currency has nothing to do with the generic statement but it is even more true in the case of currency.

It appears we can't continue this discussion since we can't even agree on the basics

[Gumby]

you are using the bank on which you are drawing the check as the intermediary to convert the bonds into cash.

Correct. But that's true of nearly all electronic money. Most money market funds hold agency debt and other forms of private credit. It's still all money.

Anyway, are you seriously suggesting that the money I keep in my savings account is not money?? Please explain how the money in my savings account — which is invested in Treasuries — is not money. I'd love to hear that explanation.

[Mdraf]

Can we do a refresh on what exactly we are disagreeing about?

However dumb the current arrangement may be for financing debt the of the federal government, it has gone on now for several decades with the Fed mostly hitting its inflation targets in the low single digits.

Everything has been pretty orderly, and interest rates have dropped...and dropped...and dropped, even as the debt and deficits of the U.S. government have gotten worse...and worse...and worse.

And one more time, I will say look at Japan if you think that this sort of arrangement can't go on...and on...and on.

When you're dealing with abstractions like points on a scoreboard, unicorn migratory patterns, or the number of angels that can dance on the head of a pin, it doesn't really matter what the quantities are--it's just a mental exercise with no real connection to the world of real things.  The monetary system is like that, with the single constraint of inflation, and when inflation does show up policymakers would be wise to take it seriously.

But until the inflation shows up, I don't know what there is to be upset about, and if you have protected yourself against the contingency of inflation by owning gold, it seems like you should be able to tune out this whole topic in the same way that you might tune out Britney Spears when she sings or Barbra Streisand when she talks politics.

All true MT. Everybody loves the credit system...until the credit goes bad.  What some of us are uneasy about is that the rubber band is getting stretched thinner and thinner and would like it retracted a little, for the sake of prudence.  It appears others feel there is no rubber band  at all.

[MediumTex]

It appears we can't continue this discussion since we can't even agree on the basics

I just want to get some agreement on what we are disagreeing on.

Are we disagreeing about the nature of the current system, OR are we disagreeing about the potential future effects of the current system?

[Gumby]

Let's see if we can set some stipulations in our debate. That way we don't keep going back to square one.  Do you agree with the following generic statements ?:

1) As the volume of credit rises, the creditworthiness of the issuer declines

True for a currency user. Not true for a currency issuer.

Currency has nothing to do with the generic statement but it is even more true in the case of currency.

It appears we can't continue this discussion since we can't even agree on the basics

Not sure how you can say that about our country's currency when the currency in our debt-based monetary system is credit. How can a currency issuer — that creates the very same currency that it denominates its own credit in — be un-creditworthy? It doesn't make any sense.

[MediumTex]

Can we do a refresh on what exactly we are disagreeing about?

However dumb the current arrangement may be for financing debt the of the federal government, it has gone on now for several decades with the Fed mostly hitting its inflation targets in the low single digits.

Everything has been pretty orderly, and interest rates have dropped...and dropped...and dropped, even as the debt and deficits of the U.S. government have gotten worse...and worse...and worse.

And one more time, I will say look at Japan if you think that this sort of arrangement can't go on...and on...and on.

When you're dealing with abstractions like points on a scoreboard, unicorn migratory patterns, or the number of angels that can dance on the head of a pin, it doesn't really matter what the quantities are--it's just a mental exercise with no real connection to the world of real things.  The monetary system is like that, with the single constraint of inflation, and when inflation does show up policymakers would be wise to take it seriously.

But until the inflation shows up, I don't know what there is to be upset about, and if you have protected yourself against the contingency of inflation by owning gold, it seems like you should be able to tune out this whole topic in the same way that you might tune out Britney Spears when she sings or Barbra Streisand when she talks politics.

All true MT. Everybody loves the credit system...until the credit goes bad.  What some of us are uneasy about is that the rubber band is getting stretched thinner and thinner and would like it retracted a little, for the sake of prudence.  It appears others feel there is no rubber band  at all.

But doesn't the last 30 years of rubber band action suggest that this is a very strange rubber band that actually gets stronger the more it is stretched?

If we agree that the U.S. will never explicitly default on its debt (why would it?), then aren't we just left with inflation as the main risk, and I think that we all agree that this is the main risk.

If you look at the 1980s dollar strength, it occurred against a backdrop of what was considered very irresponsible deficit spending and increases in the national debt.  What would the Austrian explanation be for this dollar strength in the midst of such reckless and irresponsible monetary policy?

When I used to hear the comment that "deficits don't matter" I used to think it was a comment that only a moron would make.  As I have thought about it more, though, it may not be as dumb as it sounds if the debtor also has the power to create the money in which the debt is denominated.

If the banker in a game of Monopoly runs out of cash and just starts issuing IOUs each time a person passes Go, would you express concern about his ability to keep issuing these IOUs?  I wouldn't.

[Kriegsspiel]

Can someone recommend some books that break down monetary realism Barney style?

[MediumTex]

How can a currency issuer — that creates the very same currency that it denominates its own credit in — be un-creditworthy? It doesn't make any sense.

You might even say that the ONLY truly creditworthy issuer of debt is the issuer that controls the currency in which the debt is denominated.

[Gumby]

It appears we can't continue this discussion since we can't even agree on the basics

What a cop out. You never answered my question. I wrote...

Please explain HOW monetizing all of the $16 trillion in existing Treasury bonds — that are already a part of the broad money supply — causes inflation. I'm not trying to be disrespectful, but I'm getting the feeling that you are unable to explain that.

And you answered...

Gumby, as I said in the discussion last week, it is the certainty that the Fed will buy the gov paper (at zero interest)  that enables it (the Treasury) to issue it in the first place.

...which does not explain how monetizing all of the $16 trillion in existing Treasury bonds would create any inflation. I'm fairly convinced you cannot answer the question.

Not only that, but your answer ignores the fact that the Treasury has issued $16 trillion in debt with the Fed only purchasing a minuscule portion of it!

So, it's seems pretty clear that you are unable to answer the question of how does the Fed create inflation by monetizing all $16 trillion in existing debt.

[Mdraf]

It appears we can't continue this discussion since we can't even agree on the basics

I just want to get some agreement on what we are disagreeing on.

Are we disagreeing about the nature of the current system, OR are we disagreeing about the potential future effects of the current system?

Potential future since current system is distorted manipulated

[Mdraf]

How can a currency issuer — that creates the very same currency that it denominates its own credit in — be un-creditworthy? It doesn't make any sense.

You might even say that the ONLY truly creditworthy issuer of debt is the issuer that controls the currency in which the debt is denominated.

I can think of several in my adult life: Argentina, Mexico, Russia, Thailand, Iceland - all currency issuers

[MediumTex]

It appears we can't continue this discussion since we can't even agree on the basics

I just want to get some agreement on what we are disagreeing on.

Are we disagreeing about the nature of the current system, OR are we disagreeing about the potential future effects of the current system?

Potential future since current system is distorted manipulated

But surely the last 30 years have shown that monetary policy can remain irrational longer than any of us can remain solvent, right?

The current monetary system WILL come un-wound at some point.  They always do.  But none of us can afford to wait decades for this to happen, if it happens in our lives at all.  We need something that will allow us to cover this risk now and move on.

I don't think that any of us are saying that the current system isn't going to end badly at some point; I think we are just saying that the mechanism for this bad ending won't be explicit default and it won't be treasury auctions with no buyers.

[MediumTex]

How can a currency issuer — that creates the very same currency that it denominates its own credit in — be un-creditworthy? It doesn't make any sense.

You might even say that the ONLY truly creditworthy issuer of debt is the issuer that controls the currency in which the debt is denominated.

I can think of several in my adult life: Argentina, Mexico, Russia, Thailand, Iceland - all currency issuers

Argentina pegged itself to the dollar and tried to maintain the peg for too long.  That's not really controlling your own currency.

In Iceland that was all about capital flight, which is one of the triggers for devaluation I already covered.

Mexico was a dollar peg AND capital flight situation.

Russia was a situation involving currency pegs, capital flight, plus a whole bunch of ex-communists managing monetary policy who didn't know anything about how open markets really worked.  It also didn't help that the country was being led by an alcoholic political hack who was in WAY over his head.

Each of those cases easily fit into the framework of monetary arrangements collapsing due to one or more of the following:

1. Capital flight

2. Not controlling the currency in which your debt is denominated (including ill-advised pegs)

3. Political instability

[Gumby]

Can someone recommend some books that break down monetary realism Barney style?

Here is a "Barney" style video intro to MMT — which is not Monetary Realism, but it's relatively close.

http://youtu.be/Ei_B5MTJofI

If you ignore the liberal prescriptions on employment and just ponder the underlying mechanics, you'll get a brief understanding of MR: 

[Gumby]

It appears we can't continue this discussion since we can't even agree on the basics

I just want to get some agreement on what we are disagreeing on.

Are we disagreeing about the nature of the current system, OR are we disagreeing about the potential future effects of the current system?

Potential future since current system is distorted manipulated

My only disagreement — if you can call it that — is that I countered Libertarian666's erroneous assertion that monetizing existing Treasury debt somehow causes massive inflation. It doesn't.

Mdraf took issue with my counterargument but, to this moment, has yet to provide an explanation as to how monetizing all $16 trillion in existing Treasury debt would create any inflation. If he could just explain how "monetizing" existing Treasury debt causes massive inflation, this conversation would be over. (He apparently can't explain his position, so I'm not sure how we can even disagree if he isn't willing to explain his perspective).

He keeps suggesting that the Fed's purchasing Treasury debt enables the Treasury to spend future debt (which is not what I was even talking about), but that argument falls flat when you consider that the Fed has only purchased a minuscule portion of the total outstanding Treasury debt. Secondly, Congress does not ask the Fed's permission to spend. Congress simply passes laws that enable the Treasury to spend and issue new debt, and the public willingly buys it. If the public doesn't buy it, the banks are required to buy the debt for the public when people save their newly spent deficit dollars in their savings accounts (just like the Post Bank does in Japan).

[Mdraf]

You might even say that the ONLY truly creditworthy issuer of debt is the issuer that controls the currency in which the debt is denominated.

I can think of several in my adult life: Argentina, Mexico, Russia, Thailand, Iceland - all currency issuers

Argentina pegged itself to the dollar and tried to maintain the peg for too long.  That's not really controlling your own currency.

In Iceland that was all about capital flight, which is one of the triggers for devaluation I already covered.

Mexico was a dollar peg AND capital flight situation.

Russia was a situation involving currency pegs, capital flight, plus a whole bunch of ex-communists managing monetary policy who didn't know anything about how open markets really worked.  It also didn't help that the country was being led by an alcoholic political hack who was in WAY over his head.

Each of those cases easily fit into the framework of monetary arrangements collapsing due to one or more of the following:

1. Capital flight

2. Not controlling the currency in which your debt is denominated (including ill-advised pegs)

3. Political instability

How about this:

All horses are black
If a horse is not black then obviously it isn't a horse

[Gumby]

I can think of several in my adult life: Argentina, Mexico, Russia, Thailand, Iceland - all currency issuers

Argentina pegged itself to the dollar and tried to maintain the peg for too long.  That's not really controlling your own currency.

In Iceland that was all about capital flight, which is one of the triggers for devaluation I already covered.

Mexico was a dollar peg AND capital flight situation.

Russia was a situation involving currency pegs, capital flight, plus a whole bunch of ex-communists managing monetary policy who didn't know anything about how open markets really worked.  It also didn't help that the country was being led by an alcoholic political hack who was in WAY over his head.

Each of those cases easily fit into the framework of monetary arrangements collapsing due to one or more of the following:

1. Capital flight

2. Not controlling the currency in which your debt is denominated (including ill-advised pegs)

3. Political instability

How about this:

All horses are black
If a horse is not black then obviously it isn't a horse

A donkey is not a horse. You are giving us examples of donkeys.

We already explained in a previous thread that a true fiat currency is when a country doesn't owe any foreign-denominated debt (including war reparations), has a free-floating exchange rate (i.e. no convertibility requirements, no pegs, etc.), and is the sole issuer of that currency, while all its domestic and foreign debts are denominated in the currency it solely issues.

... that's what makes a true fiat government. If that true fiat government is engaged in a brutal war, all bets go out the window.

That's how we define the "horse".

[MediumTex]

How about this:

All horses are black
If a horse is not black then obviously it isn't a horse

Based upon the premise, the statement is true, except that it starts with "If a horse is not black...", which is false based upon the premise that all horses are black.  A horse cannot NOT be black if all horses are black.

The statement should probably be "If a creature that one suspects might be a horse is not black then obviously it isn't a horse."

If the premise is false (which it is), then I don't think the rest matters.

I'm not sure what point you are making, though.

[moda0306]

Mdraf,

You can't take a piece of gold to the grocery store either...

Also, a question for you

If the government legally declared treasury bonds legal tender, would you predict hyperinflation, since the "money supply suddenly exploded?"

The fed was an act of congress.  It is a governmental entity.

Here's where we're at.... We seem to agree that the fed buying bonds of the treasury market is essentially "cheating" that allows treasuries to be priced differently by the market than they would be if the government were not cheating.  What we are saying is that this changed the nature of how we view t-bills whether we actually print money to expand M0 or not.  It has fundamentally changed the way we view t-bills to being that something much closer to base fiat currency that we only value because of three things, none of which is the existence of treasury bills on our balance sheet instead of cash:

1) We have a massively productive underlying economy.
2) We need to engage the US banking system for any hope at engaging in modern day business
3) We are taxed in US dollars and will go to jail if we don't pay them, even if we try to send the government gold or euros as payment.

The government doesn't have to "play the game" like other entities.  Why should the credit markets treat them like they do?  If you look at treasury bills you may own as anything but a government controlled savings account... If you actually look at them as a sacred IOU where the government has to somehow take a dollar out of someone's hands after a year to pay you back... as some kind of contract you have some control over, then you're fooling yourself.  Most people have quit choosing to fool themselves. Even you likely have.  This affects the market's interpretation of the asset, and rightfully so. 

In the end, fiat dollars AND treasury bonds are liabilities of the US government if they are to be assets of us (can't be any other way for a financial asset... Aka, confetti).  But it's not an IOU of future gold or even dollars, but of supporting and protecting an expanding private sector. Take that away, and dollars will lose their value.  If the fed holds interest rates far below the rate of inflation, we'll have a self-fulfilling moral hazard inflationary crisis.  If the US government collapses, our fiat "assets" become worthless and we're back to barter and other methods.

So there is a liability there, whether it's a treasury bond or cash that the government has issued, but it's not a financial liability, but a functional one.