Correlations

[Pointedstick]

I want to reiterate, Mdraf, that we're only trying to understand how the system works here. All the judgement usually takes place in Other Discussions. Now I happen to think the government is hugely dangerous, that it's toying with forces it only thinks it has control over, that it's impoverishing society by incentivizing idleness and irresponsibility, that it's creating rage against us abroad that it can then turn around and claim to protect us from... and so on and so forth. But despite all of this, I have to admit that when the Fed swaps a bond for cash, no dramatic seismic event has taken place. There's nothing about that that kicks off a hyperinflationary wave that will culminate in the dollar's collapse.

If I want to be an accurate critic of the government, I owe it to myself and others who rely on me for information to have a correct understanding of how the government actually functions. Worrying erroneously about the Fed being the entity that produces hyperinflation might dull me to the real threats.

[Mark Leavy]

But despite all of this, I have to admit that when the Fed swaps a bond for cash, no dramatic seismic event has taken place. There's nothing about that that kicks off a hyperinflationary wave that will culminate in the dollar's collapse.

If I want to be an accurate critic of the government, I owe it to myself and others who reply on me for information to have a correct understanding of how the government actually functions.

This is an outstanding comment PS.  Thank you.  I find most of your musings to be quite neutral and rational.  But that's probably my personal bias.  Regardless, whether it is your personal clarity or my personal bias I appreciate your comments.

[MediumTex]

But despite all of this, I have to admit that when the Fed swaps a bond for cash, no dramatic seismic event has taken place. There's nothing about that that kicks off a hyperinflationary wave that will culminate in the dollar's collapse.

If I want to be an accurate critic of the government, I owe it to myself and others who reply on me for information to have a correct understanding of how the government actually functions.

This is an outstanding comment PS.  Thank you.  I find most of your musings to be quite neutral and rational.  But that's probably my personal bias.  Regardless, whether it is your personal clarity or my personal bias I appreciate your comments.

I do too.

Pointedstick is great.  His reasoning is always pointed and he sticks to the path of logic, even when it may be out of step with his own previously held beliefs.  He is like an arrow with a razor sharp tip.  He is like a spear whittled to a fine point.  He is truly a pointed stick.

So many great people here.  It's such a treat to share ideas with them.

[Pointedstick]

Awwwwwwww thanks guys! 

[dragoncar]

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:

Thanks for the helpful video.  I'm not sure I understand the point about inflation.  Printing money is non inflationary if production increases accordingly.  Makes sense to me.  But to employ people in the government sector you have to print money, say, annually.  So after the first year, money supply is up say 11% and production goes from 90% production to 100% - ie producing enough for everyone.  At some point we hit our productive capacity right?  Or produce more than is demanded?

[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:

Thanks for the helpful video.  I'm not sure I understand the point about inflation.  Printing money is non inflationary if production increases accordingly.  Makes sense to me.  But to employ people in the government sector you have to print money, say, annually.  So after the first year, money supply is up say 11% and production goes from 90% production to 100% - ie producing enough for everyone.  At some point we hit our productive capacity right?  Or produce more than is demanded?

Correct. So, according to MMT, the prescription, when full employment is reached, would be to start pulling money out of the private sector via some combination of either tax increases and/or cutting spending.

MR doesn't "prescribe" anything — it just gives you a similar understanding and let's you decide how to proceed or invest accordingly.

The cool thing about all of this is that investors who understand how the mechanics of fiat money work tend to do very well when it comes to reading the market, rather than always falling for the oversimplistic fear trade that never seems to come to fruition... http://youtu.be/IKLNbDIIpq4

dragoncar, if your think about it, all monetary systems use some kind of "buffer stock policy" in order to determine how much is too much. Your buffer stock policy can be gold, wheat, chariot wheels, or some other metric. When we were on a gold standard, our "buffer stock policy" was the number of bars gold in a vault (and that gold was "monetized" into currency). Now, we just use more modern metrics like unemployment figures and inflation to determine when it's time to cut spending — it's a little more evolved than a pile of shiny rocks.

[moda0306]

Gumby,

I didn't realize T-bills are considered part of the money supply (M3)... could you provide a link that backs that?  I tried googling it.  No dice.

[Gumby]

Gumby,

I didn't realize T-bills are considered part of the money supply (M3)... could you provide a link that backs that?  I tried googling it.  No dice.

They aren't. "Broad" and M3 are two different things. I believe "broad liquidity" is the most accurate term, which most certainly includes Savings Bonds and T-Bills (and not longer term Treasuries — which aren't all that plentiful anyhow):

Policy-makers track inflation by looking at the widest measure of the money supply, called "broad liquidity." According to Investopedia (an online investors' encyclopedia):

Broad Liquidity [is] a category of the money supply which includes: all funds in M3, individual holdings in accounts, savings bonds, T-bills [Treasury bills] with maturity of less than one year, commercial papers, and banker's acceptances.

"Broad liquidity" thus includes most government securities. Longer-term securities are not technically included in this definition, but the principle still holds: cashing them out would not affect consumer prices, because the money supply would not increase and the bondholders would have no more spending money than they had before.

Source: http://www.webofdebt.com/articles/feder ... crisis.php

[moda0306]

Gumby,


You are an encyclopedia.

Btw....


Who killed Kennedy?

Was the moon landing fake?

Why does beer foam up if you tap down on the top of somebody's bottle?

Go!

[Gumby]

Who killed Kennedy?

Not sure. I heard Oswald had something to do with it. Seriously, we should really start a thread on that. It would be awesome to hear the different stories from this group.

Was the moon landing fake?

Nah. But there are some weird conspiracy theories on that one...

https://en.wikipedia.org/wiki/Moon_land ... y_theories

Why does beer foam up if you tap down on the top of somebody's bottle?

Crap. I have no idea!

[Gumby]

See, the problem with Mdraf's definition of "money" is that he wants to only think of it as a "medium of exchange." But broad money and/or broad liquidity is much more than that.

For instance, a "Savings Account" is defined as:

Saving accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money in the narrow sense of a medium of exchange (for example, by writing a cheque).

Source: https://en.wikipedia.org/wiki/Savings_deposit

I don't know anyone who doesn't consider a savings account not to be "money" simply because it doesn't directly act as a medium of exchange.

Anyway, M3 is no longer used by anyone (the Fed no longer publishes it) but "MZM" is the new M3 and MZM includes Savings Accounts and Money Market Funds that are usually invested in some T-Bills and lots of private credit invented by banks and corporations (i.e. a good deal of "Shadow Banking" securities, which dwarfs the smaller amount of Treasury securities in existence). Savings accounts are often invested in T-Bills, among other things.

Keep in mind that most people's T-Bills aren't held in a standard "Treasury Direct" account — the T-Bills that most American citizens hold and have access to are held in financial instruments, which are included in MZM. (The Treasuries held by the foreign sector aren't included in MZM as far as I know, which makes sense since those Treasury securities can't really be spent into the economy — due to laws limiting what foreign nations can buy). So, MZM really represents all highly-liquid money that people have in their cash, savings accounts and money market funds — many of which are invested in T-Bills — which can all be used to chase goods.

But, again, an enormous amount of our money supply, that can chase goods (MZM), is just shadow banking instruments. So, it's amazing to me that people focus so heavily on the relatively small amount of Treasury spending that pales in comparison to shadow banking and other forms of private credit (totaling over ~$57 trillion).

The point being that nobody really looks at "narrow money" for predicting inflation. It's far better to look at a broader definition of money (such as MZM and even MZMV) when attempting to figure out inflationary pressures.

EDIT: I wonder if looking at MZM is even all that useful when the richest 1% probably now owns a large chunk of MZM?

[l82start]

Why does beer foam up if you tap down on the top of somebody's bottle?

Go!

beer contains carbon dioxide in solution at equilibrium, If the beer is jostled the energy shakes some of the gas out of solution and the beer foams up.

the other theory is that beer has a sense of humor and aspirations to be a comedian.... it does it for the inevitable laugh it will get from drunks.

[moda0306]

Why does beer foam up if you tap down on the top of somebody's bottle?

Go!

beer contains carbon dioxide in solution at equilibrium, If the beer is jostled the energy shakes some of the gas out of solution and the beer foams up.

the other theory is that beer has a sense of humor and aspirations to be a comedian.... it does it for the inevitable laugh it will get from drunks.

I understand that, but foaming up doesn't occur when:

You do the same thing with cans.

You clink bottles sideways or top to top.

You clink your bottle up into something like a wood table.


It seems the only thing able to induce that affect is a bottle of beer coming down onto the top of another bottle of beer... And it doesn't have to be hit that hard to make I work.

[l82start]

the deep physics of gasses in solution at equilibrium in tapered cylindrical glass containers is a bit beyond me,   
a wild guess is the vibration frequency, air space above the liquid, sudden air pressure increase/decrease, container shape etc likly all play some roll in hitting the perfect combination to get the dramatic result and that other forms of jostling don't.. 




i propose we all preform a long in depth series of beer drinking experiments to isolate all the contributing factors and the proportion of their responsibility for the effect 

[Kriegsspiel]

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:

Thanks for the helpful video.  I'm not sure I understand the point about inflation.  Printing money is non inflationary if production increases accordingly.  Makes sense to me.  But to employ people in the government sector you have to print money, say, annually.  So after the first year, money supply is up say 11% and production goes from 90% production to 100% - ie producing enough for everyone.  At some point we hit our productive capacity right?  Or produce more than is demanded?

Correct. So, according to MMT, the prescription, when full employment is reached, would be to start pulling money out of the private sector via some combination of either tax increases and/or cutting spending.

MR doesn't "prescribe" anything — it just gives you a similar understanding and let's you decide how to proceed or invest accordingly.

The cool thing about all of this is that investors who understand how the mechanics of fiat money work tend to do very well when it comes to reading the market, rather than always falling for the oversimplistic fear trade that never seems to come to fruition... http://youtu.be/IKLNbDIIpq4

dragoncar, if your think about it, all monetary systems use some kind of "buffer stock policy" in order to determine how much is too much. Your buffer stock policy can be gold, wheat, chariot wheels, or some other metric. When we were on a gold standard, our "buffer stock policy" was the number of bars gold in a vault (and that gold was "monetized" into currency). Now, we just use more modern metrics like unemployment figures and inflation to determine when it's time to cut spending — it's a little more evolved than a pile of shiny rocks.

Interesting video.

The basic premise seems to be that we're so productive that all of the people in the US do not need to be employed in order to produce all the things they.... want/need/could use (?), and therefore the production isn't at the highest level, since the unemployed wouldn't be able to buy the things that could be made for them.

A bad solution in that video is for the government to tax the producers and give it to the unemployed, who will be employed as military, police, teachers. It's bad because then the producers don't have that money to spend. What is prompting the idea that the producers should be taxed, though? The purpose of government employing the unemployed, in the video, is so that they will be able to buy the entrepreneur's products.  So the obvious choice would be to only tax him, because that would create a win-win-win situation. The entrepreneur needs to employ 14 to creat products for 17, the 3 unemployed get the money through taxing the entrepreneur, who also is making more profit, since he's selling 17 taxed goods, instead of 14 untaxed goods.

His borrowing scenario is very confusing, as is the printing of money scenario, for the reasons dragoncar mentioned.

Is monetaryrealism.com a valid source to go through? I still don't feel like I understand it very much.

[Gumby]

So the obvious choice would be to only tax him

True. But I suppose they didn't have the entrepreneur consuming (from himself) in order to simplify the explanation. But, yes, I suppose that would have been one technically valid "solution" in that fantasy universe. The entrepreneur wouldn't have been very happy being taxed if he needed to consume. In reality, MMT — right or wrong — is just trying to make the private sector as productive as it can possibly be (i.e. full employment).

MMTers have a (liberal) prescriptive solution known as the "Job Guarantee". I'm oversimplifying here, but basically all of the unemployed in a country can show up to a local government office every weekday morning and be given a temporary job that matches their skill set, for whatever needs to be done (filling potholes, cleaning up parks, whatever). Anyone who wants to work gets a job. (Wasn't that the grand idea in the movie "Dave"?) The government simply prints their salary and everyone is happy. Taxes are used as a barometer or thermostat to keep inflation at bay. The prescription is theoretical — that's the "Theory" in "Modern Monetary Theory (MMT)". It turns a lot of people off — which is why many people here prefer just discussing MR — which doesn't even deal with those prescriptions.

His borrowing scenario is very confusing, as is the printing of money scenario, for the reasons dragoncar mentioned.

You are right — it's not the best explanation. He's saying that the Fed can just monetize the debt if it wanted to print unlimited money. MMTers are very much aware that the Fed does not need to monetize the debt in order for the Treasury to spend money (normally the Treasury can just issue debt and the private sector will always buy it as long as the private sector is willing to "save"). However, remember, in the fantasy universe the narrator is describing, he doesn't want the consumers to have an easy way for people to "save" their money — so I believe the narrator's goal is to eliminate the Treasuries altogether in this little example so that people have less of an incentive to save and will be more likely to spend on the entrepreneurs products. Many MMTers, such as Warren Mosler, share that desire to retire Treasuries (i.e. stop issuing longer termed Treasuries and let them run their course) and replace them with government savings accounts — but mostly because the debt causes so much confusion. I wouldn't try to overanalyze that explanation... it's just an oversimplification for that narrow universe of 17 people.

Is monetaryrealism.com a valid source to go through? I still don't feel like I understand it very much.

Monetaryrealism.com is very good. Pragcap.com and Monetaryrealism.com are both run by Cullen Roche — who founded Monetary Realism about a year ago to help people further understand the mechanics of modern fiat money. He is excellent — and he has some MR gurus that add to Monetaryrealism.com. It takes awhile to fully grasp these concepts (it took me a few months). Cullen used to be an MMTer, but he grew tired of the theoretical Job Guarantee — and its political baggage — and he just wanted to use the mechanics of MMT to make money predicting the Macro economy. So, he founded Monetary Realism (MR) and refined his understanding of the monetary system with the help of a few people who had expertise — such as Carlos Mucha. (Carlos Much, was the analyst who was responsible for discovering the famed Trillion Dollar coin loophole hidden in the law books).

[Kriegsspiel]

Ok, I'll do some reading. It just doesn't seem possible that this is a sustainable system, hopefully it comes together...

[Mdraf]

Ok, I'll do some reading. It just doesn't seem possible that this is a sustainable system, hopefully it comes together...

It omits a fundamental that debt is an asset only until it can no longer be serviced. It then becomes a liability.

[MediumTex]

Ok, I'll do some reading. It just doesn't seem possible that this is a sustainable system, hopefully it comes together...

No human institution is.

It's all transitory.

There are things that we tend to like over long periods, though, such as gold.

[MediumTex]

Ok, I'll do some reading. It just doesn't seem possible that this is a sustainable system, hopefully it comes together...

It omits a fundamental that debt is an asset only until it can no longer be serviced. It then becomes a liability.

If you have a herd of unicorns and they require a special type of food that can only be purchased at the Mdraf feed store, what are the chances that your unicorn herd will ever starve?

[Mdraf]

Ok, I'll do some reading. It just doesn't seem possible that this is a sustainable system, hopefully it comes together...

It omits a fundamental that debt is an asset only until it can no longer be serviced. It then becomes a liability.

If you have a herd of unicorns and they require a special type of food that can only be purchased at the Mdraf feed store, what are the chances that your unicorn herd will ever starve?

Feed is a tangible asset, not debt. I would have to buy it with something or grow it with my labor and field

[Pointedstick]

If you have a herd of unicorns and they require a special type of food that can only be purchased at the Mdraf feed store, what are the chances that your unicorn herd will ever starve?

Feed is a tangible asset, not debt. I would have to buy it with something or grow it with my labor and field

When people spend real dollars to purchase virtual items in video games, what are they really buying?

[Mdraf]

If you have a herd of unicorns and they require a special type of food that can only be purchased at the Mdraf feed store, what are the chances that your unicorn herd will ever starve?

Feed is a tangible asset, not debt. I would have to buy it with something or grow it with my labor and field

When people spend real dollars to purchase virtual items in video games, what are they really buying?

Entertainment

[Gumby]

Ok, I'll do some reading. It just doesn't seem possible that this is a sustainable system, hopefully it comes together...

It omits a fundamental that debt is an asset only until it can no longer be serviced. It then becomes a liability.

The debt can always be serviced by a government that creates the only currency that can service that debt, which is created from debt (i.e. debt-based currency).

Here's a more simple explanation to help illustrate why a government cannot "have" or "not have" its own fiat money as a currency issuer...

Imagine a card game, where every entity in the economy is one of the players, and you, Congress, are the scorekeeper.

The message here is the difference between being the scorekeeper and being a player.

The problem is, you are acting like one of the players when, in fact, you are the scorekeeper.

And you support your mistake with false analogies that presume you are one of the players, when, in fact, you are the scorekeeper for the dollar.

That correct analogy is between scorekeepers in card games and your role as scorekeeper for the US dollar.

As scorekeeper in a card game, you keep track of how many points everyone has.
You award points to players with winning hands.
You subtract points from players with losing hands.

So as the scorekeeper, let me ask you:

How many points do you have?

Can the scorekeeper run out of points?

When you award points to players with winning hands, where do those points come from?

When the scorekeeper subtracts points from players with losing hands, does he have more points?

Do you understand the difference between being the scorekeeper and being the players?

Source: http://moslereconomics.com/2011/07/30/m ... -a-player/

Or said more succinctly...

SCOTT PELLEY: Is that tax money that the Fed is spending?

CHAIRMAN BERNANKE: It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

The Chairman of the Federal Reserve Bank is telling us in plain English that they give out money (spend and lend) simply by changing numbers in bank accounts. There is no such thing as having to “get”? taxes (or borrow) to make a spreadsheet entry that we call “government spending.”? Computer data doesn’t come from anywhere. Everyone knows that!

Where else do we see this happen? Your team kicks a field goal and on the scoreboard, the score changes from, say, 7 points to 10 points. Does anyone wonder where the stadium got those three points? Of course not! Or you knock down 5 pins at the bowling alley and your score goes from 10 to 15. Do you worry about where the bowling alley got those points? Do you think all bowling alleys and football stadiums should have a ‘reserve of points’ in a “lock box”? to make sure you can get the points you have scored? Of course not! And if the bowling alley discovers you “foot faulted”? and lowers your score back down by 5 points, does the bowling alley now have more score to give out? Of course not!

We all know how data entry works, but somehow this has gotten turned upside down and backwards by our politicians, media, and, most all, the prominent mainstream economists.

Just keep this in mind as a starting point: The federal government doesn’t ever “have”? or “not have”? any dollars.

It’s just like the stadium, which doesn’t “have”? or “not have”? a hoard of points to give out. When it comes to the dollar, our government, working through its Federal agencies, the Federal Reserve Bank and the U.S. Treasury Department, is the score keeper. (And it also makes the rules!)

You now have the operational answer to the question: “How are we going to pay for it?”? And the answer is: the same way government pays for anything, it changes the numbers in our bank accounts.

The federal government isn’t going to “run out of money,”? as our President has mistakenly repeated. There is no such thing. Nor is it dependent on “getting”? dollars from China or anywhere else. All it takes for the government to spend is for it to change the numbers up in bank accounts at its own bank, the Federal Reserve Bank. There is no numerical limit to how much money our government can spend, whenever it wants to spend. (This includes making interest payments, as well as Social Security and Medicare payments.) It encompasses all government payments made in dollars to anyone.

This is not to say that excess government spending won’t possibly cause prices to go up (which is inflation). But it is to say that the government can’t go broke and can’t be bankrupt. There is simply no such thing.

Source: http://moslereconomics.com/wp-content/p ... s/7DIF.pdf

[MediumTex]

It omits a fundamental that debt is an asset only until it can no longer be serviced. It then becomes a liability.

If you have a herd of unicorns and they require a special type of food that can only be purchased at the Mdraf feed store, what are the chances that your unicorn herd will ever starve?

Feed is a tangible asset, not debt. I would have to buy it with something or grow it with my labor and field

I think that you ran right by the point I was trying to make.

Unicorn feed is NOT a tangible asset.  You don't grow it anywhere but in your mind.

The way you feed your unicorn herd is the same way that a currency issuer services its debt.