More MMT

[AdamA]

I've been reading a lot of the links that have been posted here about MMT. 

Still trying to wrap my brain around some things.

A big picture analogy I read the other day was as follows:  Consider a family living in an ordinary household. The parents tell the children that they will do chores and be paid for these chores with cards that the parents make.  On the first day that this system is in place, the children do no chores because they don't care about the cards.  The next morning at breakfast, however, the parents refuse to feed the children b/c they don't have any cards pay with, so, from that day on, the children do chores, because they wish to get fed. 

This explains to me what the dollar is "backed" by.  The children in this example do their chores b/c they know they need these cards to eat.  As long as they believe their parents can feed them, the cards will have value. 

MMT is less concerned with how these parents get the food they exchange for cards (which is, I think, a topic that causes a lot of debate on this site).  They can pay the children to go cultivate a garden and then feed them with the vegetables, or they can go around the neighborhood beating other parents up and stealing their food.  MMT doesn't care to make the moral/ethical distinction.  It simply states that so long as the children have faith in their parents to feed them, then the cards will have value.

It (MMT) then provides a descriptive accounting system used to keep track of these cards.

I feel like we have a hard time discussing MMT as an accounting system here b/c we always end up getting into political debates on the ethics of how the US government "feeds" its citizens.

With that as a prologue, I have some questions about this accounting system.

1.  Money out of "thin air"?

My understanding of what the Fed does is as follows:

If a bank wants to loan me money, it simply deposits the money into an account for me somewhere.  That money is, in fact, created out of thin air, not by the Fed, but by the private banking industry. 

There is, however, a catch. Although the private bank has created an asset for itself (in the form of a loan to me) it has also created a liability for itself with the Fed because it must borrow bank reserves from the Fed equivalent to the amount of my loan.  The private bank must pay interest to the Fed to do this, and it is this interest rate that will determine how willing private banks are to loan out money (low rate = more willing). 

In exchange for this interest, the Fed agrees to back up a bank if the bank is short at some point and doesn't have the reserve to allow a customer to make a withdrawal.

Is this correct?

2.  What about Quantitative Easing?

This is just where the Fed buys Treasury bonds from private banks, right? The idea is that the banks then have more reserves and will be more willing to loan, right?

3.  What exactly happened in 2008?

Basically, many of the big banks had made a lot of bad loans (mostly mortgages).  When it became obvious that the banks couldn't collect, Congress stepped in and allowed the treasury to borrow $700 billion from the Fed in order repurchase these mortgage backed securities to keep the banks solvent (TARP). 

The reason that this did not cause inflation the way people think it should is that even though the private banks were kept solvent, they are scared to start lending again, right? 

What is the constraint on this, though? I mean, at some point, if the banks know that they will be bailed out, they will start making bad loans again, right? 

I hope the ideas in this post aren't embarrassingly misguided, but I hope the questions are at least coherent enough that someone will be kind enough to answer and explain a bit.

[Mdraf]

The original card given to the children was nothing more than a voucher for the food. The food was earned by the parents who worked and added value thereby creating the food. You can't exclude that part of the equation.

[whatchamacallit]

recent quick interview with warren mosler

http://rt.com/shows/prime-interest/gove ... watch-142/

[Gumby]

A big picture analogy I read the other day was as follows:  Consider a family living in an ordinary household. The parents tell the children that they will do chores and be paid for these chores with cards that the parents make.  On the first day that this system is in place, the children do no chores because they don't care about the cards.  The next morning at breakfast, however, the parents refuse to feed the children b/c they don't have any cards pay with, so, from that day on, the children do chores, because they wish to get fed. 

This explains to me what the dollar is "backed" by.  The children in this example do their chores b/c they know they need these cards to eat.  As long as they believe their parents can feed them, the cards will have value.

I'm pretty sure the details were a bit off (the cards are just tax for living in the house/country). The proper explanation of the "cards" is here:

http://bilbo.economicoutlook.net/blog/?p=1075

I feel like we have a hard time discussing MMT as an accounting system here b/c we always end up getting into political debates on the ethics of how the US government "feeds" its citizens.

Which is why it's probably easier to just focus on MR (Monetary Realism) — which has no politically-charged prescriptions. MMT is very interesting, no doubt, but MR is really just the descriptive side of MMT, with a few a minor modifications. If you get too wrapped up in MMT, you'll just end up discussing the prescriptions — such as the highly-politicized 'Job Guarantee.'

Don't have time to answer the other questions at the moment. Perhaps others can...

[Mdraf]

A big picture analogy I read the other day was as follows:  Consider a family living in an ordinary household. The parents tell the children that they will do chores and be paid for these chores with cards that the parents make.  On the first day that this system is in place, the children do no chores because they don't care about the cards.  The next morning at breakfast, however, the parents refuse to feed the children b/c they don't have any cards pay with, so, from that day on, the children do chores, because they wish to get fed. 

This explains to me what the dollar is "backed" by.  The children in this example do their chores b/c they know they need these cards to eat.  As long as they believe their parents can feed them, the cards will have value.

I'm pretty sure the details were a bit off (the cards are just tax for living in the house/country). The proper explanation of the "cards" is here:

http://bilbo.economicoutlook.net/blog/?p=1075

I feel like we have a hard time discussing MMT as an accounting system here b/c we always end up getting into political debates on the ethics of how the US government "feeds" its citizens.

Which is why it's probably easier to just focus on MR (Monetary Realism) — which has no politically-charged prescriptions. MMT is very interesting, no doubt, but MR is really just the descriptive side of MMT, with a few a minor modifications. If you get too wrapped up in MMT, you'll just end up discussing the prescriptions — such as the highly-politicized 'Job Guarantee.'

Don't have time to answer the other questions at the moment. Perhaps others can...

The initial assumption is faulty. The child is obligated to live in the house and pay rent. The only currency are cards. That is a closed soviet system. If the child was free he would tend the garden and sell the fruit to someone else.

[moda0306]

It's not the child's garden. It's the parents.

I think it's easier to mentally place a fiat monetary structure within an existing barter society with an existing government police/military force that will arrest you and put you in jail if you don't "pay your taxes" with the fiat money you've been mailed.

Tadaaa.  Currency.

It's obviously not a perfect analogy since our system includes a circle jerk between the fed, treasury, and member banks, but it helps illustrate how a fiat currency holds its value in an otherwise productive economy.

[Mdraf]

It's not the child's garden. It's the parents.

I think it's easier to mentally place a fiat monetary structure within an existing barter society with an existing government police/military force that will arrest you and put you in jail if you don't "pay your taxes" with the fiat money you've been mailed.

Why did they mail me the fiat money?  If it was mailed to me for doing nothing but pay my taxes I don't care. It has no value to me.

[moda0306]

It's not the child's garden. It's the parents.

I think it's easier to mentally place a fiat monetary structure within an existing barter society with an existing government police/military force that will arrest you and put you in jail if you don't "pay your taxes" with the fiat money you've been mailed.

Why did they mail me the fiat money?  If it was mailed to me for doing nothing but pay my taxes I don't care. It has no value to me.

What happens when you run out?  You go to jail. You need to go out an find a way of getting more. 

[Pointedstick]

It's not the child's garden. It's the parents.

I think it's easier to mentally place a fiat monetary structure within an existing barter society with an existing government police/military force that will arrest you and put you in jail if you don't "pay your taxes" with the fiat money you've been mailed.

Why did they mail me the fiat money?  If it was mailed to me for doing nothing but pay my taxes I don't care. It has no value to me.

They mail it to you to gain control over you. It has value to you because they will carry you off and put you in a small box for the rest of your life if you don't give them back whatever arbitrary quantity of the paper they gave you that they happen to demand back.

Sucks, but that's basically how it works. Then again for a follower of Austrian economics, this shouldn't really be so hard to grasp. Government is, always has been, and always will be simple naked aggression.

[Mdraf]

It's not the child's garden. It's the parents.

I think it's easier to mentally place a fiat monetary structure within an existing barter society with an existing government police/military force that will arrest you and put you in jail if you don't "pay your taxes" with the fiat money you've been mailed.

Why did they mail me the fiat money?  If it was mailed to me for doing nothing but pay my taxes I don't care. It has no value to me.

What happens when you run out?  You go to jail. You need to go out an find a way of getting more.

Why did they mail it to me in the first place and why did they stop?  How is that an analogy to reality?

[Pointedstick]

To gain power over society in a more subtle, indirect way. It's "softer" to mail you pieces of paper and then demand some quantity back every year on pain of kidnapping or murder than it is to just threaten you with those things directly.

[moda0306]

To develop an efficient medium of exchange in an otherwise barter society.

It helps to visualize why we have a natural urge to collect dollars and it's not a game of greater fools.

[Mdraf]

A barter society BY DEFINITION has no currency.

[Mdraf]

To gain power over society in a more subtle, indirect way. It's "softer" to mail you pieces of paper and then demand some quantity back every year on pain of kidnapping or murder than it is to just threaten you with those things directly.

Again, who is mailing the paper and for what purpose and how is the amount of paper being mailed decided? Is the paper also being mailed to everybody else? For doing nothing? Is everybody getting the same amount of paper? Or is it based upon some kind of criterion?

[Pointedstick]

It's just a hypothetical example.

[Gumby]

It's just a hypothetical example.

Yeah, seriously. The "card" example is to help over-simplify how a currency works. It's not meant to be over-analyzed for loopholes in how captive a child is.

When we understand the card example, we see that in reality taxes do not really "pay" for things. For instance, a king collects taxes so that he can retrieve the previously spent physical currency in order to pay people to obey more orders. (The currency couldn't just be any shiny piece of metal. It had to have his picture stamped on each coin to be considered legal for tax payment). And it's the same currency he borrowed into existence, from goldsmiths. The taxpayers were not benefactors. The money a king spent is then forcebly removed from people's hands to maintain his currency and power. Today the money is conjured out of binary code and "borrowed" into existence by converting previously spent money into highly liquid risk free bonds to allow new digital money to be spent. The binary code and bonds are a creation of the government. The more money a government spends the more money that will exist to convert into risk free bonds to enable the creation of new digital money. Taxes merely give the illusion that someone "paid" for a few feet of asphalt or a cruise missile or ten. But, the reality is that "taxes" only give the illusion of "paying" for a small percentage of overall government spending and the money to pay for taxes must be borrowed into existence in the first place (since all money, other than physical coins, comes from public or private debt). The point being that "money" is nothing more than a government (or bank) IOU. It's all debt.

When people say that the wealthiest individuals "pay" for everything, that notion is false when you understand that all money in our society is debt-based in the first place. The currency is a conjured creation of the government (and banks). Even during medieval times the largest taxpayers were, in reality, forced to return a king's gold (that a king borrowed from goldsmiths) back to the king so he could decide what to spend it on next. Taxpayers didn't really finance a king's kingdom when you consider that he was forcibly retrieving the very currency he borrowed into existence in the first place. If anything the goldsmiths financed the kingdom. Today, the banks have replaced the goldsmiths and the government creates the currency in conjunction with the banks.

As you can see, it's awfully complex. So, the "card" example just over-simplifies the explanation.

[moda0306]

Ok this is a hypothetical barter society... The idea is that the government and society as a whole realizes how useful a currency would be... To have something to function of a medium of exchange.  So the government mails people the money and then enacts a tax to give it value, as nobody wants to go to jail.

[AdamA]

I'm pretty sure the details were a bit off (the cards are just tax for living in the house/country). The proper explanation of the "cards" is here:

http://bilbo.economicoutlook.net/blog/?p=1075

That's a great link.

Can anyone complicate it just a bit, and tell me how the Fed fits into this example?

[AdamA]

It's obviously not a perfect analogy since our system includes a circle jerk between the fed, treasury, and member banks, but it helps illustrate how a fiat currency holds its value in an otherwise productive economy.

I think it's this circle jerk that I'm having a hard time understanding  .

To use a specific example, I don't understand how it is possible for Congress to may payouts with these like TARP or QE without causing inflation in this system. 

The reason I've heard is that all these things do is "add reserves" to private banks balance sheets and keep them solvent.  It just seems like too much of a free lunch to me.  I feel like I'm missing something. 

(I'm not arguing that this shouldn't be true b/c clearly it is--just saying I don't understand the physics).

[Gumby]

I'm pretty sure the details were a bit off (the cards are just tax for living in the house/country). The proper explanation of the "cards" is here:

http://bilbo.economicoutlook.net/blog/?p=1075

That's a great link.

Can anyone complicate it just a bit, and tell me how the Fed fits into this example?

I guess you could say that the Fed is just computer with the spreadsheet clearing all the transactions. As you can see, the computer and its spreadsheet doesn't really have a huge effect on the household itself (i.e. it doesn't have the authority to change the net financial assets in the children's accounts). The computer and spreadsheet gives the parent/government the tools to change the liquidity of the household assets and manage interest rates, but that's about it.

In "theory" it doesn't really matter because the Fed and the Treasury could be combined into one entity and the "cards" example would still stand. Some MMTers say that the Fed/Treasury really should be combined to avoid all of the confusion that the separation creates. But, the easiest distinction is that the Fed conducts "Monetary Policy" and the Treasury conducts "Fiscal Policy". So, when the parent has his or her "Monetary" hat on (i.e. sitting down a the computer) that is a Fed action. When the parent decides what money to hand out, they are wearing the "Fiscal" hat.

[AdamA]

[New Economic Perspectives: Playing Monopolis Money

Also a great link.  The comments are informative too.

The overall concept makes sense to me, but I think I would understand even better if I understood what happens to make this type of fiat system sick.  What happened in 2008, exactly?  How would the balance sheet in this example look then (2008) and also after some the interventions we've tried?

[AdamA]

The computer and spreadsheet gives the parent/government the tools to change the liquidity of the household assets and manage interest rates, but that's about it.

What exactly does that mean?  I feel like this is one of the key points that I'm missing.

[moda0306]

AdamA,

The circle jerk isn't easy to swallow.

Ok wow I'm done.

It's tough though... There's some good MR links if someone would post them. I'm on my phone.

[Gumby]

The computer and spreadsheet gives the parent/government the tools to change the liquidity of the household assets and manage interest rates, but that's about it.

What exactly does that mean?  I feel like this is one of the key points that I'm missing.

I'm trying not to overcomplicate it, but the Fed just conducts "Monetary Policy" — such as changing the liquidity of assets, targeting interest rates and helping streamline transactions. These actions do not technically make the private sector (or the children) richer or poorer — they just re-optimize assets within the private sector's balance sheet.

The Treasury conducts "Fiscal Policy" such as spending money (as per Congress's instructions). The Treasury's actions certainly do make the private sector richer or poorer.

Ultimately what you are probably wondering is if whether the money supply increases when the Fed buys bonds. The answer is here:

http://pragcap.com/does-the-money-suppl ... ys-bonds-2

Like any bank, the Fed can create money “from thin air”?.  This is how it creates reserve balances to transact monetary policy.  It has always done this.  For instance, in 2006 reserve balances increased by $50B at member banks as the Fed implemented policy, but no one complained about “money printing”? and “debt monetization”? back then.  In other words, this is ALWAYS how the Fed implements policy.  But QE has caused a great deal of confusion, thanks in large part to the neoclassical confusion regarding the definition of the “money supply”?.

When the Fed purchases bonds they are simply changing the composition of the bank balance sheets...

...It’s important to note that the net financial assets of the bank are exactly the same after QE as they were before.  In other words, the bank has experienced no change in its balance sheet except the composition.

Source: http://pragcap.com/does-the-money-suppl ... ys-bonds-2

Simply changing the composition of a bank's balance sheet is an example of "monetary policy". Spending money on an aircraft carrier would be an example of "fiscal policy" and that would come from the Treasury. In other words, the Treasury is usually the entity that has the greatest effect on inflation. The Fed, on the other hand, is fairly impotent when it comes to creating inflation.

[Mdraf]

It's really not complicated at all.  It's all a big "circle jerk". You cannot create something out of nothing no matter how many web links you point to.