Some more MMT questions

[Pointedstick]

Okay, so I have some more questions about MMT/how the world actually works:


1. (probably an easy one) If a sovereign government that can print its own currency sells bonds instead of creating unbacked currency, isn't it a net wash for the supply of base money since a corresponding liability has been created? How does the supply of base money expand unless the government prints it up with no debt liability attached?

2. Do taxes only exist to create an artificial demand for the fiat currency? If so, how is the "optimal" level of taxation to be discovered?

3. Given that we all know that governments don't conform to the ideal of spending counter-cyclically on projects of public interest, and that they're run by political parties that exist to shower their voters with as much money as possible while kneecapping everything their opponents like... how good are the prospects for this peculiar monetary arrangement continuing on? Maybe I'm just too pessimistic, but I have absolutely zero faith in the U.S. Congress's ability to do anything right, ever, and understanding how they hold the reins of monetary power scares the bajeezus out of me, to be honest. It really seems like pure dumb luck that they havn't totally destroyed everything by now. Although the Austerians seem to be really trying their luck...

[Gumby]

1. (probably an easy one) If a sovereign government that can print its own currency sells bonds instead of creating unbacked currency, isn't it a net wash for the supply of base money since a corresponding liability has been created? How does the supply of base money expand unless the government prints it up with no debt liability attached?

Well.. the thing is that base money and bonds are both assets for the private sector. In other words, the government's debts are the private sector's savings. Think of it this way... Base money obviously increases net financial assets in the private sector. But, when the private sector has too much base money (known as "excess reserves") the private sector wants to convert those excess reserves into a "risk free" savings asset. So, the private sector gives its excess base money back to the Treasury for safe-keeping (in reality, the Treasury just deletes base money from private bank reserve accounts held at the Fed) and the Treasury prints up some bonds for the private sector to hold on to.

Base money and Treasury Bonds are both forms of currency for the private sector. We know this because 50% of our Permanent Portfolios are comprised of risk-free Treasuries, and we are no poorer for having handed our base money over to the Treasury.

Do taxes only exist to create an artificial demand for the fiat currency? If so, how is the "optimal" level of taxation to be discovered?

Taxes also serve to destroy base money in the private sector. Taxes are deflationary for the private sector. They help reduce inflationary pressures.

Given that we all know that governments don't conform to the ideal of spending counter-cyclically on projects of public interest, and that they're run by political parties that exist to shower their voters with as much money as possible while kneecapping everything their opponents like... how good are the prospects for this peculiar monetary arrangement continuing on? Maybe I'm just too pessimistic, but I have absolutely zero faith in the U.S. Congress's ability to do anything right, ever, and understanding how they hold the reins of monetary power scares the bajeezus out of me, to be honest. It really seems like pure dumb luck that they havn't totally destroyed everything by now. Although the Austerians seem to be really trying their luck...

Well, the system is becoming less stable as time goes on. It's really difficult to say how it will all turn out. But, US Treasuries are still the best horse in the glue factory.

[Pointedstick]

Okay, so base money is just printed dollars (or conjured-up electronic funds)? And if base money and government-debt-money both serve as a means for the private sector to save, what's the point of the government selling bonds, other than to give the banks (and people like us) seemingly risk-free assets to save with? If the government didn't sell any bonds, and simply printed all the dollars it needed, what do you think would happen in an excess reserves scenario? Actually, maybe I'm answering my own question; people and banks would put that money into riskier assets, right? So what's the balance between debt and printed money look like? Why actually print at all then? Why not just create a safe asset class for everyone to use that maybe gave off a few percentage points of interest so people could save without having to chase high-risk, high-return investments?

Actually, I know full well why not: because the government is made up of irrational fools who don't understand this system. That, and investment houses who can buy politicians probably like it when people feel the need to invest.

[hoost]

Okay, so base money is just printed dollars (or conjured-up electronic funds)? And if base money and government-debt-money both serve as a means for the private sector to save, what's the point of the government selling bonds, other than to give the banks (and people like us) seemingly risk-free assets to save with? If the government didn't sell any bonds, and simply printed all the dollars it needed, what do you think would happen in an excess reserves scenario? Actually, maybe I'm answering my own question; people and banks would put that money into riskier assets, right? So what's the balance between debt and printed money look like? Why actually print at all then? Why not just create a safe asset class for everyone to use that maybe gave off a few percentage points of interest so people could save without having to chase high-risk, high-return investments?

Actually, I know full well why not: because the government is made up of irrational fools who don't understand this system. That, and investment houses who can buy politicians probably like it when people feel the need to invest.

Base money is federal reserve notes; this includes cash in circulation and bank reserves.

Federal reserve notes are created and then exchanged for assets, typically government bonds but not always.  Since 2008 the Fed has exchanged federal reserve notes for about $1 trillion in mortgage backed securities and other troubled assets.

The Treasury issues bonds to finance its operations.  The fed does not buy bonds at auction directly from the treasury.  It buys them on the secondary market, usually from banks.  Banks like this because the are issued federal reserve notes (base money) in exchange for treasury bonds.  They can either use this base money as cash, or add to their reserves with it.  If they use the base money as reserves they can lend 10 times the amount.

If the government didn't issue bonds and simply printed the dollars it needed, no one would accept the dollars.  The beauty of the current system from the government's point of view is that no one understands it.  Even the people who understand it don't understand it.  (I don't claim to understand it...it's extremely complicated with lots of smoke and mirrors. I'm somewhere in between these two groups)

[Gumby]

if base money and government-debt-money both serve as a means for the private sector to save, what's the point of the government selling bonds, other than to give the banks (and people like us) seemingly risk-free assets to save with?

Two things: It helps drain the excess reserves (banks don't like excess reserves, since they don't earn anything). Also, the bond auctions and the Fed's Permanent Open Market Operations allow the government to control interest rates. Finally, the issuance of bonds allows the government to control spending and oversight, since the laws are already in place to do so. Keep in mind that bond issuance was necessary when there was convertibility to gold (i.e. the government would borrow funds, on paper, that it didn't have). Now its really a legacy operation.

If the government didn't sell any bonds, and simply printed all the dollars it needed, what do you think would happen in an excess reserves scenario? Actually, maybe I'm answering my own question; people and banks would put that money into riskier assets, right?

Yes and no. The excess reserves never leave the Federal Reserve (except for the notes and coins in your pocket). So, if a bank were to buy gold, they would pay the gold dealer... but the base money would just be transferred from bank A's Federal Reserve account to bank B's federal reserve account. You can't really put the (electronic) base money anywhere else. It has to stay in the Federal Reserve system. And if you think about it, even bank credit never leaves your bank. When you make a payment to someone, the Fed just looks at all of the transactions between bank A and bank B at the end of the day and just transfers the final balance of reserves at the end of the business day. So, this idea that "putting money into riskier assets" doesn't really make a difference since the base money doesn't ever leave the Federal Reserve.

So what's the balance between debt and printed money look like?

It's more complicated than you think. Most of the base money that's been printed has been converted into risk-free Treasuries. Again, the national debt is our private sector's savings.

Why actually print at all then?

So, that we have money.

Why not just create a safe asset class for everyone to use that maybe gave off a few percentage points of interest so people could save without having to chase high-risk, high-return investments?

They do. They're called Treasuries.

[Gumby]

If the government didn't issue bonds and simply printed the dollars it needed, no one would accept the dollars.

Not true at all. Lincoln issued Greenbacks and didn't issue corresponding bonds. Everyone gladly accepted them. They are still valid currency if you can find them.

[MachineGhost]

1. (probably an easy one) If a sovereign government that can print its own currency sells bonds instead of creating unbacked currency, isn't it a net wash for the supply of base money since a corresponding liability has been created? How does the supply of base money expand unless the government prints it up with no debt liability attached?

The Fed does has the monetary policy power to create new base money, i.e. electrons or Federal Reserve Notes.  But, this power is only predicated on the Treasury to have previously issued its Treasuries to back such, since the Fed can only purchase those Treasuries with that newly created base money (or illegally, by purchasing non-Federal Reserve Act mandated securities, such as sub-prime mortgage bonds).  Either way, the public ultimately holds both the Treasuries (by directly buying them) and the Federal Reserve Notes (indirectly as payment) as "net financial assets", and that is how the deficit is financed by fiscal policy.

2. Do taxes only exist to create an artificial demand for the fiat currency? If so, how is the "optimal" level of taxation to be discovered?

Studies that have looked at this find that a 20% overall taxation rate is optimal.  We're pretty far right of that on the Laffer Curve.  So long as Hong Kong, Singapore, Estonia, etc. have taxation levels close to that, they will continue to kick the West's ass.

Actually, I know full well why not: because the government is made up of irrational fools who don't understand this system. Tongue That, and investment houses who can buy politicians probably like it when people feel the need to invest.

Time to read The Creature from Jekyll Island.  Crony capitalism at its finest!

MG

[Greg]

Here's some more interesting MMT Currencies at a University

http://www.cnbc.com/id/46314208/The_Buc ... _for_Money