This post may get a bit rambling. It's an attempt to tie together a couple of different strands that I've been thinking and reading about.
Modern monetary theory (MMT) in a nutshell, at least as far as I see it, goes something like this. Back in the 1990s a couple of clever guys came up with the idea of a government-provided jobs guarantee. They realized that this program would be seen by the public as an expensive boondoggle requiring sky-high taxes and huge debts. Could they outflank these criticisms by finding another way to fund the jobs guarantee?
To find the funds the early MMTers worked backwards through the labyrinthine relationship between the Federal Reserve and the Treasury. What they claimed to have discovered at the end of their trek was certainly shocking. The US Treasury, they said, funds itself not by the conventional route of taxes and bonds, but by creating and directly spending fiat (i.e. inconvertible) money. Furthermore, it is not only the government's prerogative, but its obligation to spend this money into existence, since people need a stock of fiat money to pay their taxes. Bonds, contrary to what most of us think, are not a sign of government indebtedness—rather, they drain spending.
This bit of monetary jiu-jitsu is powerful because it has the ability to disarm people's instinctual aversion to expensive social programs. If all it takes to fund a jobs guarantee is that the government spend money, and debt and taxes are not the great evils we have been trained to think, then why resist it?
Most governments don't create fiat money—their central banks do. For a government to have this power, it needs to be able to force its central bank to add new money to the government account. One way to do this is for the government to print up a bond and give it to the central bank. The central bank then credits the government's account for the full amount of the bond, and now the government can spend, say on a jobs guarantee. Alternatively, the transaction can be completed without the transferral of the bond—just have the central bank automatically credit the government's account prior to spending. When the government can require its central bank to create money on its behalf, we say that they are effectively consolidated into one entity.
The earliest MMT tome, Wray's Understanding Modern Money, is very insistent on the consolidated nature of the Fed-Treasury:
"The important thing to notice is that the Treasury spends before and without regard to either previous receipt of taxes or prior bond sales."Now as their critics were quick to point out (see Lavoie, for instance), the relationship between Fed and Treasury is such that the two are not consolidated. The Treasury cannot ask the Fed to credit its account, nor can the Treasury print up a bond and give it to the Fed in exchange for spending power. The only way the Treasury can spend is by moving previously acquired funds that are held in the private banking system into its Federal Reserve account—and the only way it can acquire these funds is through taxes and bond issues. Using the Fed to print money and fund a jobs guarantee program is impossible.
"...permanent consolidated government deficits are the theoretical and practical norm in a modern economy... Further, government spending is always financed through creation of fiat money - rather than through tax revenues or bond sales."
"While it appears that the Treasury 'needs' the tax revenue so that it can spend, that is clearly a superficial view... The government certainly does not need to have its own IOU returned before it can spend; rather, the public needs the government's IOU before it can pay taxes."
The MMT wish, it would seem, was the father to the thought—Wray's 1998 tome was too hasty in consolidating the Fed and Treasury. MMTers are left with an intriguing theory of how modern money works, yet their theory corresponds to no underlying reality. That doesn't mean that MMT is without some merits. MMTers are hackers. In their efforts to reverse engineer the Fed-Treasury nexus in order to fund their pet project, they've come across plenty of interesting minutiae about monetary operations. MMT papers and blogs go into these details and are worth reading if you want to hone your understanding of the monetary system [just take anything they say about consolidation with a grain of salt].
Has the lack of overlap between Wray 1998's theory and reality stopped MMTers? Not at all. When your theory doesn't describe reality, don't bother changing your theory—change reality so that it conforms to your theory. Enter the platinum coin.
The idea of issuing a trillion dollar platinum coin rose to prominence with the onset of yet another US debt ceiling crisis. The MMT blogs hummed about the coin, a huge coin crescendo grew on Twitter, and the issue went all the way to the White House, which demurred. My hunch is that beating the debt ceiling is only a tertiary motive for MMTer excitement over the platinum coin. Far more important to them is that the platinum coin, if implemented, will effectively consolidate the Fed and Treasury, finally redeeming Wray 1998. This opens to door to their beloved jobs guarantee.
I'm not sure how MMT will evolve, but one thing we'll probably see more of is platinum coin-style activism. Though the rest of world has moved on from the coin, the MMT blogs are still buzzing about it. I'm sure more clever ways to hack the Fed-Treasury nexus will be found, thereby giving the Treasury other routes by which to force Bernanke or whomever follows him to print dollars on demand. These hack-arounds will be publicized. Perhaps a political movement will form. This wouldn't be unique. All sorts parties have formed around monetary ideas—Greenbackism, Free Silver, and Social Credit.
I've always wondered why MMTers ignore Canada. Of all the major central banks, the Bank of Canada conforms most fully to the MMT ideal. Consider this—the Bank of Canada routinely buys bonds directly from the government. The Fed, ECB, and other central banks can only buy government debt on secondary markets. This degree of consolidation goes beyond the ability to participate in bond auctions. The BoC is permitted to lend directly to both the Federal and provincial governments without requiring any security whatsoever. Section 18(j) of the Bank of Canada Act says that the Bank may
make loans to the Government of Canada or the government of any province, but such loans outstanding at any one time shall not, in the case of the Government of Canada, exceed one-third of the estimated revenue of the Government of Canada for its fiscal year, and shall not, in the case of a provincial government, exceed one-fourth of that government’s estimated revenue for its fiscal year, and such loans shall be repaid before the end of the first quarter after the end of the fiscal year of the government that has contracted the loan.The US Treasury was once allowed to go into overdraft at the Fed, but this hasn't been permitted since 1981. And even when it could have its account credited, overdraft loans were quite limited in size and duration.
The Bank of Canada is engaged in a very MMT-like operation right now. As I wrote in an earlier post, the Federal government is currently implementing what it calls a prudential liquidity management plan. The BoC typically buys 15% or so of bonds auctioned off by the government. It does so on a non-competitive basis, meaning that it pays the average of all competitive bids submitted to the auction. The traditional 15% allocation is enough to ensure that maturing government debt held in the BoC's portfolio is replaced. In late 2011, the government asked the Bank to fund its prudential liquidity plan by raising its allocation at government bond auctions to 20%. Because this larger allocation is more than enough to make up for maturing debt, the BoC's balance sheet has been growing quite fast. At the same time, the government's account at the BoC, which usually hovers at around $2 billion, now clocks in at $11.5 billion, and by 2014 or so, should rise to $20 billion. Below is a chart of the Bank of Canada's balance sheet. Note the large jumps in government bond holdings (red) and deposits (bottom green).
MMTers might not agree with the prudential liquidity plan, but it surely represents the sort of consolidation they are so anxious to see in the US.
So what happens when the Federal government begins to spend down its prudential balances held at the BoC? Private banks will quickly realize that they have far too many clearing balances and will try to get rid of them. Canada's overnight lending rate will collapse below its target rate. In order to bring the rate back up to target, the BoC can do any number of things.
1) Sell assets from its existing portfolio, thereby withdrawing excess clearing balances.
2) Issue Bank of Canada sterilization bills, which banks will purchase directly from the BoC with excess clearing balances.
Alternatively, the BoC can work together with the government:
3) Ask the government to issue more bonds, depositing the proceeds at the Bank of Canada. Bonds here are fulfilling the money-draining purpose that MMTers like to emphasize.
4) Ask the government to increase taxes, depositing the proceed at the BoC. Just like bonds, taxes would be draining previously spent money.
Finally, the BoC can simply leave this spending unsterilized.
5) Rather than withdraw (i.e. sterilize) balances, let the excess supply drag the overnight rate to the deposit rate. All clearing balances now earn the deposit rate.
The BoC currently maintains a corridor system. During the day, private Canadian banks make and receive hundreds of thousands of payments. By lunch time on a normal day there will be a number of debtor and creditor banks. Debtors can settle with a creditor by borrowing clearing balances from the BoC on a collateralized basis and transferring these balances to their creditor. By the end of the day, the BoC will have typically swallowed up large amounts of collateral as it creates and lends whatever quantity of intraday clearing balances that deficit banks require.
Banks who have borrowed balances to fund a deficit are free to maintain these positions overnight, but are dissuaded from doing so because the rate which they must pay to the BoC, the bank rate, is 0.25% above the market overnight rate. Nor do surplus banks wish to keep the quantities of clearing balances they have received at the BoC overnight, since the deposit rate is 0.25% below the market rate. As a result, those banks holding clearing balances are incentivized to transfer them to those banks that are in debt to the BoC. This transfer allows the deficit banks to pay back their intraday debts to the BoC and get their collateral back. In short, BoC balances are not attractive to maintain so they reflux back to the Bank of Canada. A good visual aid is to think of the central bank as a blowfish: it blows up during the day and sucks itself back in at night when it isn't needed.
If it turns to this last solution, the Bank of Canada will be throwing away its corridor system and adopting a floor system. Steve Waldman generated plenty of discussion on his recent series of blog posts on floor systems. As the Federal government spends down its $20 billion prudential balance at the BoC, all private banks will end up holding excess clearing balances. There is no way for them to contract among each other to remove this excess. Only one option remains to the banks—hold these balances overnight and receive the deposit rate. The Bank of Canada would be a permanently inflated blowfish.
If it adopts a floor, the BoC wouldn't be the first. The Federal Reserve stumbled its way into a floor system in 2008 by injecting so many reserves that it was unable to sterilize them. But a floor system is by no means universally accidental. The Reserve Bank of New Zealand chose to adopt a floor in 2006. When it maintained a corridor, the RBNZ began to notice signs of stress in the banking system that it traced to insufficient liquidity. Evidence included delayed or 'just-in-time' payments, failed settlement, collateral hoarding, and increasing use of the bank's overnight lending facility.
Between July and October 2006, the RBNZ moved to a fully "cashed up" system by injecting $7 billion worth of settlement cash on which it paid interest. Banks had typically required $3-5 billion worth of intraday credit in order to meet their payment requirements. Now that there was a permanent $7 billion worth of balances, there was no longer any need for banks to get intraday loans from the RBNZ, nor scramble for collateral to qualify for these loans. Banks ceased waiting till the end of the day to make payments. The time of day when 50% of all payments were completed was moved up by two hours compared to when the corridor system was in place. (See the RBNZ's account of this here.) Flattening out settlement over a trading day can be desirable since settlement delays, especially if they spread from participant to participant, can be costly.
The Bank of Canada has toyed with an RBNZ-style cashed up system. In response to the credit crisis, in May 2009 the BoC injected $3 billion of excess settlement balances into the clearing system, pushing the overnight rate down to the Bank's deposit rate. This excess was removed in June 2010, a year later. We know from a presentation by former Deputy BoC Governor David Longworth that much like New Zealand, Canadian payments tended to be made earlier in the day during the period between May 2009 and June 2010. If the Federal government's prudential balances at the BoC are spent down, a decision to use the occasion to move to a floor system rather than sterilizing this spending would not be without precedent or merit.
[If you're interested on this subject, this paper relates the US experience with excess reserves. Much like Canada and New Zealand, US payments after the onset of excess reserves were more evenly distributed throughout the day.]
Back to MMT, where this whole ramble started. Much a large corporate conglomerate, MMT might benefit from being dismantled. Beholden to the jobs guarantee division, the monetary division has made unrealistic claims about the nature of consolidation. Now it is turning to monetary activism. The monetary division would be less conflicted, and therefore be taken more seriously, if it was spun off from its parent. As separate corporations, the jobs guarantee folks could focus on lobbying governments like Canada to use their central banks to fund social programs, freeing the monetary folks to focus on how monetary systems actually work. Why not deconsolidate MMT?
Another good post JP. My brain is not up to it nowadays. Just one thought:ReplyDelete
I don't think you get the idea behind the Jobs Guarantee. Here's my take on it:
It's like Price level targeting, only W replaces P.
It's like a gold standard, in a coutry where there is a gold mine in every town where anyone can pan for gold. Only it's paper, not gold.
It makes the supply of money perfectly elastic wrt the nominal wage W.
Put W on the vertical axis, Y on the horizontal axis, and you get a horizontal AD curve.
In other words, it is an intrinsic part of the JG idea that it be money-financed.
(I may have misrepresented what MMTers are saying, but I don't really care. I am more interested in interesting ideas than in what MMTers are really saying.)
It's an interesting idea, that is theoretically very neat. Totally impractical, because labour is one of the least homogenous goods. But theoretically very neat.
Nick, that's an interesting take on the jobs guarantee. Would you say that it is somewhat equivalent to what David Glasner sometimes talks about - nominal wage targeting?Delete
Ok, I think I found your post here. That's interesting, I think I get your point now. If that's what the MMTers actually mean, I missed it. Lost in translation perhaps?Delete
I agree with Nick's approach.Delete
One there are institutional arrangements between the central bank and the government and second there is real side of economics as opposed to the monetary side.
Whatever is the first ... (there is so much tendency to show that the JG can be implemented that the monetary description turns counterproductive)...
MMTers claim that the JG acts as a price anchor and having turned the Philips curve on its head, which is incorrect.
If the government somehow manages to offer jobs (leaving aside how this is implemented) at some $x per hour, it is no guarantee to limit inflation because the offer itself doesn't set wages for people employed elsewhere.
If fiscal policy is tightened in case there is inflation in such a scenario, it still produces unemployment because the scheme is like - take the JG job or FO. One may end up with lower real output in such a scheme.
Damn thing ate my comment!Delete
JP: you found my old post! I couldn't have found it!
Yes, it's very much like what David and Scott are saying when they talk about nominal wage level path targeting. Except, the JG is a way to implement WLPT via direct convertibility of labour for gold.
1. Unlike the gold standard, where there was two-way convertibility because you could either buy or sell gold for paper, in the JG there is only one-way convertibility. If there's an excess demand for money at Wbar you can sell labour for money to increase the supply of money. But you cannot buy labour at the central bank if there's an excess supply of money, because the central bank doesn't keep a stock of labour in the basement. So the JG would need some additional mechanism to constantly withdraw a flow of money from circulation (e.g. taxes), so that there is always a strictly positive flow demand for money at the JG window. And that additional mechanism would have to withdraw a very large steady flow to cope with a sharp drop in the stiock demand for money.
2. Unlike gold, workers and jobs are all very different, so W is a vector, or an index number. And the sort of jobs the government needs doing, and the sort of workers needed to do those jobs, would be vectors that vary over time.
(My 1 and 2 are sort of coming to the same conclusion as Ramanan).
I too sometimes find it very hard to understand what MMTers are saying, because they speak funny! Yep, lost in translation. Normally I give up trying to understand them, and try to reverse-engineer their policy recommendations.Delete
Typo: It should read: "Yes, it's very much like what David and Scott are saying when they talk about nominal wage level path targeting. Except, the JG is a way to implement WLPT via direct convertibility of labour for PAPER."Delete
Nick, so we've got either one-way convertibility into labour or indirect convertibility (target the wage level indirectly by open market operations in bonds, just like we do now with inflation), but do we end up at the same final resting point with these two different schemes?Delete
Ramanan, interesting points.
Get it straight from the source-ReplyDelete
It all came from here in 1993:
And the history is here in my short book:
and all I claim is that an employed labor buffer stock is a superior price anchor to today's policy of an unemployed labor buffer stock. that write up can be found here:
And it all comes together in my general theory here:
Warren, thanks for the links. I'll give them a read.Delete
I have found that in interpreting MMT, it is important to distinguish the general macro-theoretical picture offered by MMT from the descriptions of current operational details of specific systems, and from prescriptive claims about the best techniques to use for macroeconomic stabilization. For example, the discussions about the consolidated balance sheet view of the economy are not mainly meant to be descriptions of existing degrees of operational integration. The main point is that the central bank and the Treasury are both parts of the federal government sector, and to understand the total government role in the financial system and the broader economy you need to view those two branches from the pint of view of a single consolidated balance sheet.
This approach can be seen as an outgrowth of Minsky's view that "a capitalist economy can be described by a set of interrelated balance sheets and income statements." Wray got this approach directly from Minsky, whereas I think Mosler developed it independently and intuitively on the basis of direct experience in the banking sector. Of course how many balance sheets you employ in any given model is a question of utility and appropriateness for the problem at hand. For example, for some policy questions about what various agencies in the executive branch can and can't do, you would want to view the Social Security Trust Fund and the Treasury General Fund as two different operational components of the government that are not fully consolidated. On the other hand, to understand the role of the entire Treasury in the economy, you will want to think of these balance sheets as just two sub-accounts to a single more comprehensive account.
So when Wray says, as you quote him, "permanent consolidated government deficits are the theoretical and practical norm in a modern economy... Further, government spending is always financed through creation of fiat money - rather than through tax revenues or bond sales." I believe the intention is to describe the stance of the entire federal government sector, Fed + Treasury combined. The point is that the normal net financial position of the entire government sector during a give fiscal period is an overall deficit. This includes (i) money coming into the government both in the form of taxes and in the form of dollars used to purchase assets from either the Treasury or the Fed (ii) other financial assets moving from private sector balance sheets to either the Treasury or Fed balance sheet, (iii) dollars flowing out of the government in the form of either Treasury spending or Fed emissions of dollars to purchase assets or pay interest on reserves, (iv) other financial assets moving from Treasury or Fed balance sheets to private sector balance sheets. Warren Mosler uses the term "net financial assets" in this connection, and so I believe the proper interpretation of the "deficit" part of Wray's statement is that the normal stance of the federal government sector over a given period of time is to be a net issuer of financial assets, i.e. financial asset claims on the government by the private sector grow and federal government liabilities to the private sector increase correspondingly.
(cont. from above)ReplyDelete
The government might have imposed upon itself the operational rule that it can only spend dollars and not bonds, and that to supply the spending account (Treasury) with adequate dollars it might have to swap bonds for existing dollars held by the private sector. But those private sector dollars were themselves emitted previously by the government. There is no other way they can get into the system. (Commercial bank dollars are just claims on the banks' reserves, which are directly emitted by the government. When a private entity buys a bond by issuing a payment order on its bank account, that necessitates a transfer of bank reserves from a private sector account to a Treasury account.)
The fact that one branch of government currently issues the currency - the non-maturing zero-interest liabilities - and the other branch issues the maturing, interest-bearing securities is a present operational choice made by Congress that Congress could alter whenever it likes. There are a variety of ways in which the operational responsibilities could be re-aligned. For example, the Fed could issue the bonds and manage exchange rates, and the Treasury could issue the currency in the very act of spending. You can think up all sorts of ways of setting up the accounting systems, the operational details and the rules. In my recent post at NEP "From Central Bank Independence to Democratic Public Finance" I offered a variety of proposals to get people thinking along these reformist lines. I doubt the actual economists associated with MMT would agree with all - maybe not even most - of these proposals. However, the macro-theoretical picture doesn't depend on how the operational details are or are not re-organized.
"The main point is that the central bank and the Treasury are both parts of the federal government sector, and to understand the total government role in the financial system and the broader economy you need to view those two branches from the pint of view of a single consolidated balance sheet."Delete
You might. I don't. To understand most historical monetary systems you have to work with a disaggregated view in which the government is distinct from a private central clearing house... or there is no centralized clearing house whatsoever. To understand why the Bank of Canada is doing what it is, and why the Fed can't replicate it, you need to disaggregate the two central banks from their respective treasuries. I'm not interested in losing resolution and detail for the sake of some other goal.
"There are a variety of ways in which the operational responsibilities could be re-aligned. For example, the Fed could issue the bonds and manage exchange rates, and the Treasury could issue the currency in the very act of spending."Delete
Or the private sector could issue currency, leaving the Fed to issue reserves. Or the Fed could be privatized. Or the government could issue notes, leaving the private sector to run the clearing house. Or notes could be abolished. There are infinite ways to redraw the system... all that interests me is the situation as it is now.
Some questions are not just about the about the monetary system, but the way in which the entire government is acting on the economy and being acted upon by it. For some purposes it makes sense to abstract the respiratory system from the circulatory system; for others you need to see them as an integrated whole. The monetary system is not easily separated from the system of public finance.ReplyDelete
I agree with you JP, and have had the same argument with MMTers many times. MMTers claim to understand the monetary system, but as far as I know, they have no disciples from a background in central bank market operations.ReplyDelete
One problem I had when I read Wray's book is that he is a bit hazy about what happens to workers who won't take a job at the guaranteed wage - I suspect that he would reduce or even do away with unemployment benefit so that the unemployed had very little alternative but to take a guaranteed job. Which many would consider close to slavery.
"MMTers claim to understand the monetary system, but as far as I know, they have no disciples from a background in central bank market operations."Delete
I've always wished that the manager of the System Open Market Account for the Federal Open Market Committee blogged, or popped up in blog comments. It would make all conversations so much easier.
“Much a large corporate conglomerate, MMT might benefit from being dismantled. Beholden to the jobs guarantee division, the monetary division has made unrealistic claims about the nature of consolidation. Now it is turning to monetary activism. The monetary division would be less conflicted, and therefore be taken more seriously, if it was spun off from its parent. As separate corporations, the jobs guarantee folks could focus on lobbying governments like Canada to use their central banks to fund social programs, freeing the monetary folks to focus on how monetary systems actually work. Why not deconsolidate MMT?”
I think you provided the answer:
“To find the funds the early MMTers worked backwards through the labyrinthine relationship between the Federal Reserve and the Treasury... This bit of monetary jiu-jitsu is powerful because it has the ability to disarm people's instinctual aversion to expensive social programs... Now as their critics were quick to point out (see Lavoie, for instance), the relationship between Fed and Treasury is such that the two are not consolidated... MMTers are left with an intriguing theory of how modern money works, yet their theory corresponds to no underlying reality... MMTers are hackers. In their efforts to reverse engineer the Fed-Treasury nexus in order to fund their pet project...”
Thanks for stopping by JKH. Always look forward to your comments.Delete
The post was a bit rambling and serves to highlight the strength of MMT that is missed by the author.ReplyDelete
MMT is the best thing to hit the economics profession in my lifetime, but its simplicity and clarity of presentation is too much for those invested in overly complex and dysfunctional models.
There was nothing of substance in this post, just random potshots, so I'll reply in kind and wasting my time with Koning again...
Sorry. I'll try to be more civil...ReplyDelete
MMT to me represents a coherent macroeconomic framework. Obviously the job guarantee is an add-on to the basic Post Keynesian narrative. Nothing you said here contradicts MMT as far as I can tell (I quit reading as I didn't see anything of particular interest.) I don't think the facts are at issue, and I respect your right to have a different frame of reference.
Speaking of that-- What is your frame of reference? Is there a school of economic thought which works for J.P. Koning? Or don't you believe in such categorization.
Thanks. Sorry again for my rudeness above...
No offense taken.Delete
My frame of reference is a microeconomic one. I'm interested in money, liquidity, and the structure of real world monetary systems and arrangements. I'm skeptical of most macroeconomic theories since they tend to abstract from the details I'm interested in. Macro theories usually tread on the toes of people who are genuinely interested in money.
MMT wants the monetary system to be structured in a certain way although it isn't. Given this gap between is and ought, MMTers (ie. Wray 1998) usually just assume the structural impediments don't exist. For people like me who are interested in structure and detail, that's sloppy.
Yeah but it isn't as if MMT does not hammer home the phrase "self imposed constraint" all over the place. You can use the term self imposed constraint unless you are acknowledging a self imposed constraint.Delete
It doesn't matter to me who is right but this is the way I understand it based on my MMT readings...ReplyDelete
MMT SAYS Treasury cannot ask the Fed to credit its account, nor can the Treasury print up a bond and give it to the Fed in exchange for spending power. MMT SAYS The only way the Treasury can spend is by moving previously acquired funds that are held in the private banking system into its Federal Reserve account—and the only way it can acquire these funds is through taxes and bond issues.
It seems to me that all that was done was to remove the "MMT SAYS" part in the above. Maybe MMT is wrong in the way it describes monetary operations but I do know that I learned the above specifically from MMT writings so I'm not sure what the point of stating the above without the MMT SAYS part.
DAB, the first half of this post is written as a history-of-thought. I start with Wray in 1998, which was very insistent that the Treasury could ask the Fed to credit its account. After criticisms (Lavoie, 2003 for instance) this language was softened to 'self-imposed constraint.' Many internet-MMTers are still not aware of this distinction. In any case, Wray got the details wrong. Prescriptions are fine insofar as they don't sacrifice descriptions.Delete
Regarding some of your quotes from Wray:Delete
"Further, government spending is always financed through creation of fiat money - rather than through tax revenues or bond sales."
This is correct in the case of the US, as the currency is simply a government liability - a government "IOU".
Liabilities are created when they are issued, and extinguished when they are returned to the issuer. As such, payment of taxes simply extinguishes government liabilities (money), and government spending creates new government liabilities (money).
The same is true for bond sales, although in this case another government liability is also issued in the form of a bond.
"While it appears that the Treasury 'needs' the tax revenue so that it can spend, that is clearly a superficial view... The government certainly does not need to have its own IOU returned before it can spend; rather, the public needs the government's IOU before it can pay taxes."
The point here is that when a government IOU (i.e. money) is returned to the government (through taxes etc), the government doesn't then "have" any additional money or "funds" which it can then "use" to spend.
Payment to the Treasury simply extinguishes a government liability. Government spending then creates a new government liability, i.e. creates money.
The Treasury account at the Fed shows "extinguished government liabilities" as a positive balance.
With the current institutional arrangements, the Treasury is required to have a positive balance in its account at the Fed before it spends. This doesn't change the above logic, however. All it means is that the government is supposed to extinguish an equivalent amount of outstanding liabilities when it creates new ones by spending.
That's my understanding of it anyway.
"The point here is that when a government IOU (i.e. money) is returned to the government (through taxes etc), the government doesn't then "have" any additional money or "funds" which it can then "use" to spend. "Delete
The point is you confuse how you want it to work and how it works.
It is conceptually okay to say a few things such as that but you try to make it look as if it literally happens.
No, the US Treasury not only has an account at the Federal Reserve but also at commercial banks which it uses to spend.
So suppose the US Treasury wants to transfer funds during the day for making expenditure payments. It transfers funds from the account at commercial banks to the account at the Federal Reserve and then transfers these funds to make the payment.
"With the current institutional arrangements"
Yeah... but upstairs you write as if what you have written is happens under current institutional arrangements.
"suppose the US Treasury wants to transfer funds during the day for making expenditure payments. It transfers funds from the account at commercial banks to the account at the Federal Reserve and then transfers these funds to make the payment."Delete
That doesn't make any difference to what I said above.
"That doesn't make any difference to what I said above."Delete
Well you said:
"The point here is that when a government IOU (i.e. money) is returned to the government (through taxes etc), the government doesn't then "have" any additional money or "funds" which it can then "use" to spend. "
Why do you want to play this game?
Look you can be clear on your point about power and limits of fiscal policy but the way you do it is counterproductive.
I'm not playing any game. It's very simple:Delete
Say you have $0.
You write "I owe you $1" on a piece of paper, and give it to someone.
You now have a $1 liability.
The person then gives the piece of paper back to you.
Do you now have additional funds? No! Your liability has simply been extinguished. You have $0 again.
It's the same with the government.
The money paid into the Treasury's account is a government liability. When the Treasury has a positive balance in its account at the Fed, that means the government is holding its own liabilities. As such those government liabilities have been extinguished.
As in the example above, it's not logically possible for the government to get "additional funds" by acquiring its own liabilities. All that does is extinguish those liabilities - it doesn't provide the government with any additional assets.
The institutional arrangements might make it look like the government does get "funds" in this way, but its actually not logically possible.
"you can be clear on your point about power and limits of fiscal policy"
Not sure what you mean by that.
"As in the example above, it's not logically possible for the government to get "additional funds" by acquiring its own liabilities"Delete
Well in real life, the Treasury also holds funds in commercial banks. These funds are not its own liabilities.
"The institutional arrangements might make it look like the government does get "funds" in this way, but its actually not logically possible."
The arrangements show that the government actually gets the funds.
"the Treasury also holds funds in commercial banks"Delete
I know. As you said these are called in to the Treasury's account at the Fed and then payments are made from this account.
"The arrangements show that the government actually gets the funds."
Could you answer this question please: When someone gives you back your own IOU, do you then have additional funds?
"Could you answer this question please: When someone gives you back your own IOU, do you then have additional funds?"Delete
When someone makes a tax payment in the US, what happens is that the TTL bank debits the tax payers account and credits the Treasury's account. The funds at the TTL is not the Treasury's self-liability.
That's true. The deposit in the TTL account is a bank liability (fully backed by government bonds). The deposit represents a promise made by the bank to pay government liabilities to the government on demand.Delete
That makes it a bit different to your bank account, for example. The deposit in your bank account does not represent a promise made by the bank to pay you your own liabilities on demand.
The Treasury keeps deposits in TTL accounts instead of holding them in its account at the Fed. This means the reserves stay in the banking system (thereby reducing disruptions), and the Treasury also earns some interest.
When someone makes a tax payment, their bank credits the TTL account as you say. But then at some point the Treasury 'calls in' the payment. At that point the TTL account is debited, the bank's reserve account is debited, and the Treasury's account at the Fed is credited. The Treasury spends out of this account.
Look stop playing this game.Delete
You first wrote statements as if the Treasury *literally* has no financial assets which I showed was false. Then regarding TTL - true for the TTL accounts, the banks need to hold Treasuries but in no sense the Treasury can be said to have zero financial assets.
It has positive assets which are deposits held at banks.
It is a bit like a repo. JP Morgan can lend funds by accepting JP Morgan bonds as repo.
The Treasury lends the funds out as well as part of the cash management operation. These funds cannot be said to be "fully backed by government bonds". For example the Term Investment Option plan accepts collateral other than Treasuries.
The point is that your effort to prove that the US Treasury has far superior powers turn counterproductive with silly statements such as government appears to be getting the funds does not get the funds and is not "logically possible". Ha!
I'm not playing a game.Delete
I didn't say the Treasury has no financial assets.
As you said, when someone makes a tax payment, their bank debits their account and credits the TTL account.
Then, at some later point, the Treasury 'calls in' that tax payment from the bank. The bank then debits the TTL account, the Fed debits the bank's reserve account, and credits the Treasury's account at the Fed. The Treasury spends out of this account.
I said "it's not logically possible for the government to get "additional funds" by acquiring its own liabilities. All that does is extinguish those liabilities - it doesn't provide the government with any additional assets." That's just basic logic.
I then asked you: "When someone gives you back your own IOU, do you then have additional funds?" but you didn't reply, for some reason.
"It has positive assets which are deposits held at banks"
The deposits in TTL accounts are nominally Treasury assets, as they are bank liabilities. But they're simply bank promises to pay government liabilities to the government on demand. As I said, when the Treasury calls in these deposits, the bank pays the Treasury with reserves.
"I didn't say the Treasury has no financial assets."Delete
but you said:
"the government doesn't then "have" any additional money or "funds" which it can then "use" to spend."
and there you go again:
"All that does is extinguish those liabilities - it doesn't provide the government with any additional assets." That's just basic logic."
Total nonsense. When the tax is paid, the government's assets increase.
I am done.
You confuse a simplified conceptual description with what happens literally.
I'm with James, as I have no idea what Ramanan's point is...Delete
Yeah not unexpected.Delete
The point is that your efforts to prove that fiscal policy has far greater powers than is generally acknowledged runs counterproductive when you make incorrect statements.
Here is one example:
"And what happens if you were to go to your local IRS office
to pay your taxes with actual cash? First, you would hand over
your pile of currency to the person on duty as payment. Next,
he’d count it, give you a receipt and, hopefully, a thank you for
helping to pay for social security, interest on the national debt,
and the Iraq war. Then, after you, the tax payer, left the room,
he’d take that hard-earned cash you just forked over and throw
it in a shredder."
From the seven deadly innocent frauds book.
It is true that misfit notes are shredded but it is another thing to say that all notes paid as taxes are shredded as Warren Mosler claims.
The point I am trying to make is that you guys make statements which are literally untrue.
I understand the point you are trying to get across. But if you phrase it in a manner which is literally incorrect, then you will struggle to make more complicated analysis.
So I see JP arguing that the government does not have an overdraft facility at the central bank and can default if auctions fail repeatedly. I understand this is a highly unlikely scenario but you need to address this straightforwardly and argue that (a)it is highly unlikely (b) what happens if this situation arises ...
instead you go around stating the Treasury simply credits bank accounts and so on.
For example there are a lot of descriptions over the Neochartalist blogs which says that if nobody buys bonds, the deficit spending simply appears as reserves. This is factually incorrect. The President may need to do some legal actions to directly take an overdraft (or mint a platinum coin) and given the situation in Washington, it is not even given that this will be approved.
"Simply credits bank accounts using keystrokes" and all that are simple sales strategies. That statement implies the government can simple spend without even having running auctions for an indefinite period. All it has to do it is so simply credit bank accounts and nothing more.
You will lose an immense amount of credibility if you do such doublespeak.
"when a government IOU (i.e. money) is returned to the government (through taxes etc), the government doesn't then "have" any additional money or "funds" which it can then "use" to spend."
"when a government IOU is returned to the government".
That occurs when payment is made to the Treasury's account at the Fed.
Deposits are held in TTL accounts before they are 'called in'. Then payment is made to the Treasury's account at the Fed. The link I provided explains this quite clearly.
"it's not logically possible for the government to get "additional funds" by acquiring its own liabilities. All that does is extinguish those liabilities - it doesn't provide the government with any additional assets."
That is just basic logic. I don't know why it annoys you.
"the government does not have an overdraft facility at the central bank and can default if auctions fail repeatedly"
Even if that were to happen it doesn't change what I said. See my 'left hand/ right hand' example below.
"there are a lot of descriptions over the Neochartalist blogs which says that if nobody buys bonds, the deficit spending simply appears as reserves."
I think this is based on the assumption/assertion that the Fed won't or can't refuse to clear a payment made by the Treasury. i.e. "Treasury cheques don't bounce".
"The link I provided explains this quite clearly."Delete
I know. I don't need your Fed link. In fact I mentioned it before you mentioned it.
"That is just basic logic. I don't know why it annoys you."
No, when taxes are paid, the government acquires a financial asset at its TTL account. But for you it is not "logically possible"
"Fed won't or can't refuse to clear a payment made by the Treasury"
Listen, if it were as simple, the US Treasury need not run a cash management operation. The fact that it can find itself potentially in a position where it has less funds to pay than inflows due to taxes and bond sales means it has a cash management department.
The Federal Reserve cannot clear cheques by law if the Treasury's account has a zero balance.
" "Treasury cheques don't bounce"."
In 1979, the US Treasury did actually delay payments on some T-bills.
"when taxes are paid, the government acquires a financial asset at its TTL account. But for you it is not "logically possible"Delete
For some reason you keep ignoring what I say. I said:
"it's not logically possible for the government to get "additional funds" by acquiring its own liabilities."
Deposits in TTL accounts are bank liabilities, not government liabilities. The government "acquires its own liability" when payment is made to the Treasury's account at the Fed. Deposits are held in TTL accounts temporarily before payment is made to the Treasury's account at the Fed.
"Deposits in TTL accounts are bank liabilities, not government liabilities."Delete
Yes, so when taxes are paid, the government's assets as increase, unlike what you claim.
The TTL deposit is a Treasury asset, so it's a government asset. It's basically a type of loan to the bank from the Treasury.Delete
As I said, the Treasury holds deposits in TTL accounts temporarily, before it "calls them in". Then the TTL account is debited and payment is made to the Treasury's account at the Fed. When this happens, the government "acquires its own liabilities" as I said above.
As I said, "it's not logically possible for the government to get "additional funds" by acquiring its own liabilities. All that does is extinguish those liabilities - it doesn't provide the government with any additional assets".
In fact, when the TTL account is debited and payment is made to the Treasury's account, the government asset, in the form of the TTL deposit, is eliminated (i.e. the bank's liability is extinguished).
The government doesn't spend out of the TTL accounts, it spends out of the Treasury's account at the Fed. So final payment has to be made to the Treasury's account at the Fed.
The TTL accounts are temporary "holding pens" for deposits that haven't been paid to the Treasury's account at the Fed yet.
"As I said, the Treasury holds deposits in TTL accounts temporarily, before it "calls them in""Delete
Yes, but when the Treasury gets tax receipts, its assets increase because of the TTL deposits.
Second, the Treasury uses these funds to make payments.
If the Treasury has a positive balance in its account at the Fed, then the Treasury has an asset. That asset is a liability of the Fed, and a liability of the government.Delete
In that case, the government is holding its own liability.
When the Treasury gets taxes, its assets increase as TTL deposits. When it makes payments these very funds are called. If there isn't any funds the Treasury is using, these funds at TTL need not be called. In complete opposite of your original claim:Delete
"the government doesn't then "have" any additional money or "funds" which it can then "use" to spend."
When TTL deposits are called in to the Treasury's account, the government receives its own liabilities.Delete
James, the US Treasury does not issue new liabilities ("money") by spending. Only the Fed can spend new money into the economy. It does so by purchasing assets. The Treasury can only fund itself by securing a portion of the already-issued stock of dollars in an economy. The Treasury secures this portion by taxes and bond issues. When the Treasury deposits tax/bond earnings at the Fed, these dollars are not extinguished. If they were to be extinguished, the Treasury would have nothing to spend and would default! These structures are by no means universal - I point out how Canada is different - but they exist nonetheless.ReplyDelete
Think of it like this: call yourself ‘the government’. Call your right hand your ‘central bank’ and your left hand your ‘treasury’. Then write "I owe you $1" on a piece of paper. Put the piece of paper in your right hand, and give it to someone.Delete
You now owe that person $1. You have created a new liability for yourself.
Now take the piece of paper back with your left hand (treasury).
Your $1 liability has now been extinguished.
Now 'spend' by giving the piece of paper back to the person with your left hand (treasury).
You now owe that person $1. You have created a new liability for yourself.
So: payment to your left hand (treasury) extinguishes your liability, and spending with your left hand (treasury) creates a new liability for you.
The piece of paper itself is never destroyed - it is first issued by your right hand, then placed in your left hand, then re-issued by your left hand. However, when it is in your possession - whether in your left or right hand, it is no longer a liability. It is just a piece of paper with writing on it.
Now, you can make things a bit more complicated by saying that the piece of paper is also a liability of your right hand (central bank) and an asset to your left hand (treasury), but this doesn’t change the above. Payment to your left hand (treasury) still extinguishes your liability, and spending with your left hand still creates a new liability for you. The internal accounting between your left and right hand doesn’t change this fact.
If you make it illegal for your right hand to place new pieces of paper directly into your left hand, or make it illegal for your left hand to issue new pieces of paper directly to other people, it still doesn’t change this fact.
While you are free to use a low level of granularity to build your understanding of the world, I'm interested in the complexities of real world monetary systems, not broad macro projects, and therefore I only find it sufficient to use high levels of granularity in all monetary conversations.Delete
It's a fallacy to assume that one can simply transfer whatever insights one learns in a low-level universe to conversations that necessitate highly granular thinking. Any conversation about what the real-world Treasury is capable of doing (or not) must be conducted using a highly granular vocabulary. The conversation can't be resolved by resorting to the low-level universe that you have constructed in your most recent response -- you're talking Greek in Paraguay.
ok, but its also possible to lose sight of the forest because of all the trees in the way.Delete
Plus we've seen with all this debt ceiling nonsense that the details don't really matter in the big picture. There was never going to be a default and the bluff was called. These distinctions between Treasury and the Fed are like "work to rule", convenient as an occasional tactic, but of no real substance in the overall scheme of things...Delete
I agree with James on this one. I regard government "debt" as functionally the same as money. It is perfectly liquid. So when the Treasury creates debt, it is creating money out of thin air for all practical purposes. Certainly, the experience of QE in the U.S. and Japan validates this perspective, as does all other experience in my opinion...ReplyDelete
I just ran across this article in the Washington Post which says much the same thing:Delete
Yet debt is simply a new form of currency that is issued, bought, priced and sold like any other currency,
The difference between government debt and Federal Reserve liabilities is that the latter are perpetual whereas the former must be paid back. See here.Delete
According to this: http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdfDelete
Treasury coin is treated as government equity under U.S. accounting conventions (Federal Accounting Standards Advisory Board (2012)).
(see page 6, 3rd paragraph).
Right, the government "debt" is not exactly the same as money (Federal Reserve liabilities). But they're close enough substitutes for most macroeconomic purposes. Treasuries are perfectly liquid as illustrated by the ubiquitous repo market.ReplyDelete
And the post you referenced is of theoretical interest only. Practically, government bonds are guaranteed by the government...