Gyroscopic Investing

A thought provoking video...

Where Does Money Come From?

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Regardless of your politics, if you should happen to disagree with the video, I hope you'll please explain where money comes from.

Gumby wrote: A thought provoking video...

Where Does Money Come From?

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Regardless of your politics, if you should happen to disagree with the video, I hope you'll please explain where money comes from.

Great video.

Is there another that addresses the issue of why the government borrows money ("that is another discussion")?

Adam1226 wrote:Great video.

Is there another that addresses the issue of why the government borrows money ("that is another discussion")?

We used to issue bonds because we were revenue constrained (not enough gold reserves at all times to fund spending without creating inflation). Treasury Bond issuance is now a relic of the gold standard that serves only to help the Fed hit its target interest rate (a pure monetary operation — mostly between the Fed and its Primary Dealers — to control the Fed Funds Target Rate). By law, Congress mandates the issuance of bonds for its spending, and the need for accountability. But, technically speaking, that law is a relic of the gold standard era.

My question to the MMT'ers is "what's the point of using bonds to manipulate interest rates?"  

The way I see the puzzles fitting is this.  In a typical recession, you've got 1) businesses and households either deleveraging or saving or not willing to take on more debt because they're either under capacity (businesses) or have a debt-overhang, thus creating more savings (seeking interest) in the system, 2) an increase in unemployed populace that wants to earn wages and has time to work, and unwilling to take on debt since they are at risk, and 3) businesses under capacity, and therefore in need of demand, and unwilling to take on debt because "why expand when under capacity?"  

See how these three "unmet" demands kind of self-fulfill each other?  No one group... savers, businessmen, nor consumers... can really break the cycle.  Businesses want customers before they borrow, the populace wants a job before they spend or borrow, and the savers want borrowers to pay them interest.

So in this situation, a Keynesian & MMT economist would say you have a circular "market friction" where you've got businesses who want more demand, people who want wage income and have the time to work, and savers who want a return on savings, and too few borrowers, too few spenders, and too little demand to allow the system to run (exxageration, but you see the friction). So, the government can step in to solve all problems at once by simultaneously pleasing businesses with more demand from spending, the populace by getting factories to capacity and giving them a job, and please savers by giving them demand for loans that there's now so much supply (more savings in the banks) for.

Why take it any further?...

I think the next step in trying to create demand is in "monetizing debt" to try to turn those savers into spenders by decreasing the demand for loans and increasing reserves.  This will mean market friction again, but only on one side... the savers that have too few borrowers willing to pay decent interest.  The hope is, as far as I can see it, to turn these people consumers or maybe equity investors, since way too few businesses and households are willing to borrow compared to the supply of loanable funds in savings accounts and available to bond houses.

This is different than what had happened so far, before the monetization, because now it seems the fed/treasury, instead of trying to meet a circular set of unmet demands at the same time, is actually trying to CHANGE the demands from saving to spending.

So if the government can spend as much as it wants on its own and drum up demand that way, why try to turn private savings into private spending by "monetizing debt (or choosing to spend without issuing bonds in a MMT system)?"

I think I've heard that MMT'ers much prefer to actually issue (and not necessarily monetize) enough debt to increase demand for borrowing to appease savers, but to also deficit spend enough to appease the demand-seeking business community and employment-seeking society.

How do MMT'ers see using monetary policy in the context of what I've deemed to be the mechanics of how they see the government stepping into the system?  Is my description correct?

Gumby wrote: Regardless of your politics, if you should happen to disagree with the video, I hope you'll please explain where money comes from.

Where does money come from?  Easy--the earth!  It can also be found between #78 and #80 on the periodic table. 

Seriously though, the video was entertaining but critically flawed.  To say that the money supply = national debt is a tragic comedy of errors. 

I think that one way of understanding these things is to always remember that goods and services are tangible.  They are REAL. 

Debt and money, however, are purely abstract concepts.  They are just numbers that jump from ledger to ledger, and in the public sector cannot be touched or fit within any kind of finite way of thinking.

When people attempt to think of debt and money in the way they think of goods and services, it gets confusing.  This way of thinking makes sense in a household setting, where there is a sort of zero sum element in that there is a limited amount of money and debt to be exchanged for some amount of goods and services.

In the public setting, however, the money and debt are purely abstract concepts that can be increased or reduced based upon the needs of the finite world of goods and services.

It is a chilling realization that government debt is not intended to ever be paid off, or even reduced in size substantially.

I remember reading in the late 1990s about how many economists were worried about what would happen if the U.S. national debt ever came close to being paid off. 

It's a strange system.

I wonder how long it will last.

Wonk wrote:To say that the money supply = national debt is a tragic comedy of errors.

Ok. Explain it to us then. Where does the money supply come from? It's a simple question.

So I guess I'm slowly coming to the conclusion that going into debt in recessions may not "punish" savers, but give them exactly what they want... demand for loans that would otherwise simply not be there...

Further, deficit spending in recessions gives businesses what they want: Demand for their products that wouldn't otherwise be there.

Lastly, deficit spending in recessions gives households what they want: Demand for their work that wouldn't otherwise be there.

I'm not saying that this Keynesian interference is perfect, but moreso asking about the next step....

What happens after all this, when the fed monetizes a bunch of debt, resulting in a much higher supply of loanable funds than demand for loans?  This will lower rates, yes, but what are we hoping to have happen here?  Sally Saver to take her money and buy a TV?  Sammy Saver to take his money and invest in a widget factory?  

Maybe this part REALLY becomes a problem when Sally & Sammy Saver buy a TV from Japan and invest in a widget factory in China... creating the private sector debt problem we have today.

Gumby wrote:

Wonk wrote:To say that the money supply = national debt is a tragic comedy of errors.

Ok. Explain it to us then. Where does the money supply come from? It's a simple question.

It seems to me that the level of bank lending would have more impact on the money supply than the level of national debt.

moda,

How about the market distortions and misallocations of capital that result from the private sector making business decisions based upon phantom demand created solely by government spending?

It's sort of like the missile manufacturer that builds missiles because the government is willing to buy them, but the government is only buying the missiles to keep the missile manufacturer in business (including his U.S. missile factory), and the government is actually firing the missiles at shadows in a desert in Yemen just to get rid of them.

Isn't this just a broken window fallacy scenario?

MediumTex wrote:

Gumby wrote:

Wonk wrote:To say that the money supply = national debt is a tragic comedy of errors.

Ok. Explain it to us then. Where does the money supply come from? It's a simple question.

It seems to me that the level of bank lending would have more impact on the money supply than the level of national debt.

It might seem that way, but the M1 Money Multiplier says otherwise:

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The M1 Money Multiplier has been dropping for years, and officially tanked in 2008. It is dead in the water right now. And yet, the money supply is going up inversely to the M1 Money Multiplier. Hmmm..

Besides... what you're talking about is "lending." That would imply that most of the money in circulation needs to be paid back to the banks.

MT,

That's what makes me question the nature of expansion of credit... it seems to me that we've created a system, both with the private and public sector, where people don't TRULY "save" in the purest sense of the word, in mass, because they've gotten so used to expecting ROI on their "savings."

This interest represents somebody else going into debt.  But savers have gone from stuffing gold into bags in the olden days to wanting (demanding) that their money "work" for them.

If this is truly a demand by the public sector, then are we really outside the realm of what government policy should be in recessions if/when the government uses that demand in its decision-making process of how much to tax vs go into debt (notice I haven't hit on monetizing debt yet).

I think I'd actually WANT my government analyzing the economy for where its demand frictions are before deciding whether to run deficits (fund government through borrowing vs taxing), or maybe to even increase spending to create demand for work where the private sector isn't, while simultaneously creating demand for loanable funds where the private sector isn't.

But hasn't the money multiplier been dropping simply because the private sector was slowly becoming saturated with debt?

In 2008, the private sector finally reached the point of complete saturation where no new debt could be taken on under any circumstances, and thus the money multiplier fell off a cliff.

Doesn't this still come back to private sector lending as an important factor in the money supply?

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The broad point you are making (I think) also helps to make sense of how WWII was useful from an economic perspective.

Overall, this topic gives me that feeling that Brody had in Jaws when he said "You're gonna need a bigger boat."

Gumby wrote: Where does the money supply come from? It's a simple question.

I'm not trying to be obtuse, but could you be more specific?  Which form of money supply?

Moda,

Does that mean that every prolonged economic downturn must end in war?

This seems to be the historical pattern.

You can only build so many roads and schools.

I have thought of that angle, MT... but your example wreaks of crony capitalism, where government is probably in cahoots with the missile manufacturer to meet a "phantom" demand instead of a real demand of society that they're unable to meet due to financial/economic constraints.  I would hope that at most times government can find things better than shadows to shoot missiles at (there's no real circular demand there), dig ditches, fill them back in, etc.

What if the government goes into debt (creating demand for loanable funds), but instead of killing the cycle by creating demand for a missile and shooting it at a shadow, you create demand for a teacher of math and science to teach students better or whatever "unmet demand" society seems to be exhibiting.

So in that instance, not only is the saver happy, so is the unemployed science teacher, as well as the student who is now learning more... and the business that the teacher shops at, to boot.

Sorry, I'm a bit behind your posts MT.

We can build only so many roads and schools and absolutely shouldn't go to war for fiscal stimulus.

I share your concerns about exaclty what the logical end is to my argument.

I just seem to think that if there's a demand loop being unmet on three sides by our American society, it's hardly going to make our private-sector balance-sheets better to try to balance budgets.

Wonk wrote:

Gumby wrote: Where does the money supply come from? It's a simple question.

I'm not trying to be obtuse, but could you be more specific?  Which form of money supply?

The initial money that was created (spent into existed) by the government. That money is the only part of the money creation chain that is not tied to a liability, and is thus a net addition to the money supply in circulation.

If the bear gets money from the bank, then it’s a loan. In other words, attached to that money is a liability, so no new assets are created. Only the government can spend money in the form of net new financial assets.

MediumTex wrote:Doesn't this still come back to private sector lending as an important factor in the money supply?

Absolutely it's a factor. But, again, those are loans. Bank don’t create net financial assets. They create debt based money with an asset and liability.

Gumby wrote:

MediumTex wrote:Doesn't this still come back to private sector lending as an important factor in the money supply?

Absolutely it's a factor. But, again, those are loans. Bank don’t create net financial assets. They create debt based money with an asset and liability.

Doesn't the government do the same thing by borrowing treasuries into existence?

It seems like it would be a lot more convenient if we DID just print money, with no evidence left behind in the form of t-bonds.

I guess I'd add this... I know that we can hold assets outside of loans, but every liability that we're calling a "problem" in society (I completely agree that our private-sector debt problem is large) is offset by someone else loaning out funds and holding an asset, by their own choice.  They'd still hold an asset if not loaned, but it wouldn't pay interest... and they wouldn't like that.

I think, in net, the problem with the expansion of credit lies as much in savers seeking interest as it lies in borrowers willing to go into debt... both of which feed our fractional-reserve system.  You can't have one without the other, and both sides go into these arrangements under their own free will.

If we go with your plan to liquidate all these debts, I wonder how much that solves anything?  If Sally Saver loses $1 Million in bonds and Billy Borrower loses $1 million in debt... aren't we in the same place we started, balance-sheet wise?

MediumTex wrote:

Gumby wrote:

MediumTex wrote:Doesn't this still come back to private sector lending as an important factor in the money supply?

Absolutely it's a factor. But, again, those are loans. Bank don’t create net financial assets. They create debt based money with an asset and liability.

Doesn't the government do the same thing by borrowing treasuries into existence?

It seems like it would be a lot more convenient if we DID just print money, with no evidence left behind in the form of t-bonds.

Isn't that effectively what we do when we monetize the debt... something we've been doing a lot of lately?

I think the purpose, at least in the MMTer view, of going into "debt," is to allow interest-seeking savers to reap the interest that they are so looking for... thus completing the "frictional unmet demand cycle."

Gumby wrote: The initial money that was created (spent into existed) by the government. That money is the only part of the money creation chain that is not tied to a liability, and is thus a net addition to the money supply in circulation.

If the bear gets money from the bank, then it’s a loan. In other words, attached to that money is a liability, so no new assets are created. Only the government can spend money in the form of net new financial assets.

Ok, I'm assuming when you say "money supply," you are referring to the monetary base and not M1, M2 or the previously reported M3.  Ask 10 different economists what "money" is and you'll get 10 different answers.

Anyway, The Fed can hold just about whatever assets it wants on its balance sheet to expand the monetary base, which forms the basis of commercial bank lending.  Even freshly minted t-bills have a liability attached to them due to the counterparty--in this case, Uncle Sam.

I wasn't joking when I said money comes from the earth.  Gold is the center of the monetary universe.  It is the asset in which all other forms of "money" are multiplied from.  If you are not familiar, have a look at "Exter's Pyramid"

http://en.wikipedia.org/wiki/John_Exter

Gold is the only money there is.  All other forms of money have an associated counterparty risk and have an associated premium paid to the market for that risk.  Therefore, all other forms of money are forms of "lent money."

Moda,

I think you are imagining a world in which 100 people are playing a game of musical chair and there are 100 chairs.  If the music stops it's not that big a deal--everyone gets a chair, even if it's not exactly the chair they had in mind.

What I am imagining is a world in which 100 people are playing musical chairs and they were told that there were 99 chairs, but when the music stops they discover that there are actually only 7 or 8 chairs.  Rather than allowing a riot over the 7 or 8 chairs, the government comes in and orders that the music be restarted and changes the chair accounting rules in a way that convinces the players that there are, in fact, 99 chairs.

Wonk,

How would you respond to someone who said that energy is actually the only money there is, and that gold is just a proxy for energy?  In other words, it is energy that is really the closest way of capturing a unit of human labor in a portable package that has intrinsic value.

By "energy" I mean fossil fuels in an industrial economy, but I also mean food and livestock in a pre-industrial economy.

Notice that gold never seems to go anywhere without oil following it...or is it vice versa?