When two central bankers love each other very much....
Is that before or after their butts turn bright red?
I'm fairly certain the Fed is fucked-up and all of that, but that article seems to hang a great deal of weight on a very small hook.
I though the article was pretty good. What's the question?
According to Scott Fullwiler, associate professor of economics at Wartburg College, the money multiplier model is not just broken, but is obsolete. Banks do not lend based on what they have in reserve. They can borrow reserves as needed after making loans.
MMT 101 says loans create reserves. I think.
Concerning the gaping federal deficit, Congressman Ron Paul has an excellent idea: have the Fed simply write off the federal securities purchased with funds created in its quantitative easing programs.
The econosphere discussed this last week. This I didn't understand.
Was the idea behind QE2 really to funnel more cash to the banks by buying up assets in the hopes that they would lend some of it out? Doesn't this assume that they are somehow afraid that they lack liquidity, which, given they have a lot of cash already and we've demonstrated that they have nothing to fear from a crisis in liquidity, is absurd?
Or is this another comment wherein I demonstrate my financial ignorance.
Also, it seems to assume that by definition "foreign banks" make no loans in the US, which is...odd. Not that I wouldn't be surprised that a lot of it ended up converted into kidneys in Mongolia or whatnot.
Was the idea behind QE2 really to funnel more cash to the banks by buying up assets in the hopes that they would lend some of it out?
Yes, that's basically it. Also, give the impression there might be inflation in the future, thus encouraging them to climb off the pile of cash and do something with it. Further, make holding cash in general less attractive than holding other stuff.
The whole thing sounds like someone saying "Lets vote ourselves another raise before the hookers get here." I'm sure its more complicated than that, though.
Doesn't this assume that they are somehow afraid that they lack liquidity, which, given they have a lot of cash already and we've demonstrated that they have nothing to fear from a crisis in liquidity, is absurd?
Well, technically they don't have a lot of cash. They have a lot of Treasuries and other highly liquid assets. And new regulations are going to require them to hold even more, so it's not absurd on that count.
More generally, QE doesn't just benefit the primary dealers' liquidity. It indirectly hoovers up Treasuries from end investors, who in theory will invest it in other, possibly private sector securities. In practice, what they seem to have done is invest it in commodities.
I hear from family ' obama s new lending regulations make it hard for business to get loans to expand.' Which sound like either basel 3, or more likely what a banker tells you when he is trying to repair his balance sheet and you don't have very conspiring levels of sales.
Anyway felony is appears saying the point is to increase the supply of safe assets. But to me, it sounds like the best thing would be to buy up risky assets, which none wants right now and duo are underpriced, making creation of new one un lucrative.
The crudest way to understand the idea behind "quantitative easing" is this: imagine the cause of recessions is literally there's not enough money to go around. We'd all like to to go the store, but somehow all of the extra greenbacks burned up in a fire. So the easiest fix would be for the government to print up some money. The government could just print out money and mail it out, but the institutional arrangements in the US make this impossible. The Fed has to print the money, and use it to buy assets. If they ever decide that they printed too much money, they're supposed to sell the assets and then burn the money.
Normally, the Fed prints money and uses it to buy short-term Treasury debt, say 3-month bonds. But now the interest rate on 3-month bonds is zero. So there's no difference between 3-month bonds (since they now pay no interest) and money (which doesn't pay interest either), so this becomes pointless. "Quantitative easing" means that the Fed buys longer-term debt instead, which still has a positive interest rate.
"Quantitative easing" means that the Fed buys longer-term debt instead, which still has a positive interest rate.
The idea, isn't it (pretending humility), is to being down long interest rates, thereby making it a) more profitable for banks to loan, and b) making it less profitable for banks+ to hoard money, and c) making risky loans with higher returns (like manufacturing expansion) more attractive?
You know, I am sticking with my plan of late 2008. "Print til they make us stop" and use that money to buy foreign bonds.
As I understand the recent problem with QE as hinted in linked article, Greek bonds (Port, IRL, etc) are paying whatever, 26%, and CDS/CDOs etc make the gamble against Greek default playable. So I'll bet European banks and hedge funds are getting the cheap t-bills, using them to buy Greek bonds, and after several layers of insurance, betting on the European Gov'ts to bail them out.
Now if the US Gov't would use QE to buy the Greek bonds instead of the hedge fuckers, it would devalue the dollar and help exports, force Greece and other Euro gov'ts to fiscal stimulate and inflate and consume US products, and many other wunnderful things.
When I was thinkin on this in early 2009, I considered the collapse in trade, really after WW One until the mid-fifties and the lack of rebalancing and global uplift of local fiscal stimulus during the Great Depression. Sweden, Germany, Japan, the US with decent Keynesian programs never really got going because their trading partners were weak.
Think local, act global!
I mean, the problem with even the imaginary Keynesian fiscal stimulus proposed by Krug etc is that we purchase so much of our job-creating products (food, oil, commods) that the profits go overseas and the multipliers suck. Leeeaaaakkkkyyyy.
Normally, the Fed prints money and uses it to buy short-term Treasury debt, say 3-month bonds.
Hey, wait. Does this mean that all of the cash in circulation is technically part of the "national debt?"
Why? Isn't the national debt the sum total of outstanding Treasury securities, and isn't all of the cash in circulation backed by Treasury securities? Do the securities held by the Fed not count as debt? (Ron Paul seems to think they do, but...).
The securities held by the Social Security Trust Fund do not, though, count as debt, if I recall correctly.
isn't all of the cash in circulation backed by Treasury securities?
Don't think so, no. It's just backed by the US gov't's reputation, not by particular securities, if I understand correctly.
I mean, being backed by securities would be circular -- a treasury bond is a piece of paper in return for which the government will give you money. If money was a piece of paper in return for which the government would give you treasury bonds, then something would be amiss.
If money was a piece of paper in return for which the government would give you treasury bonds, then something would be amiss.
But of course the government will give you treasury bonds in exchange for money. That's the whole point of treasury bonds.
And since the Federal Reserve Bank, rather than any government, prints money, I think that's how the government has to get money in the first place.
But of course the government will give you treasury bonds in exchange for money.
They don't have to. If the government had sold all the debt it wanted to, and wasn't going to borrow any more this week, you could show up with money and they wouldn't have to give you bonds for it.
In contrast, when a currency is backed by gold, it means that if you show up with a bill and ask for gold, they have to give you the gold.
And since the Federal Reserve Bank, rather than any government, prints money,
Um, the US Treasury? (I'm being genuinely, rather than sardonically, hesitant. I'm sure you're wrong about US currency being 'backed' by treasury bonds, but I'm not clear enough on the details to be firm about the explanation.)
It feels funny to give information in the process of asking for it, but only the Fed can create Federal Reserve Notes, through a somewhat complicated process which nonetheless doesn't allow any discretion on the part of the government when it comes to printing money. And Federal Reserve Notes are backed by whatever's in the Fed's mattresses, which is mostly but not only Treasury securities.
Since these Treasury securities are purchased on the open market, it seems pretty likely that they are part of the national debt; but since they don't have to be Treasury securities, there's not necessarily a 1:1 correlation between greenbacks and dollars of national debt.
It feels funny to give information in the process of asking for it, but only the Fed can create Federal Reserve Notes, through a somewhat complicated process which nonetheless doesn't allow any discretion on the part of the government when it comes to printing money.
This is, of course, correct -- I just did some reading to straighten myself out. I don't know why, but finance just doesn't stick in my head. Nothing's that hard to understand when I'm reading it, but I forget it instantly.
And Federal Reserve Notes are backed by whatever's in the Fed's mattresses, which is mostly but not only Treasury securities.
Saying that money is 'backed' by Treasury securities still seems wrong to me, though (and recognize that I'm speaking from a position of profound confusion here). If it were so, wouldn't it be logically impossible to, say, pay off the national debt? I don't see how money can be backed by treasury bonds unless there's a required link between the money supply and the debt.
This is kind of a stupid question because actually currency is trivial in comparison to either the money supply or debt.
All of the money in circulation is backed by actual assets, though not necessarily short-term Treasury securities. The Treasury securities owned by the Fed do count as part of the national debt. These are both arguably accounting fictions, though (this is the MMT position). This is why Ron Paul made his suggestion that the Fed give a bunch of its Treasuries back to the Treasury.
On the Fed's balance sheet, money counts as a liability, so for the Fed to be solvent on paper, it has to have an equal amount of assets. The only practical significance of this is that if the Fed wants to extinguish money (a liability), it has to trade an asset for it, so that the balance sheet balances. If the Fed wants to create money, it has to acquire an asset to balance it, so it prints the money, and uses it to buy an asset. So on paper, the Fed is like a regular bank, except it's a bank that can issue magical IOUs (money) such that if you try to cash in the IOU, they can pay in another IOU.
23: It's not quite literally impossible to pay off the national debt, since in the theory the Fed could hold gold or mortgage-backed securities or something. But in practice, the government can't pay off its debt in its entirety, since it will want the Fed to keep some to back the currency.
Okay, I think I understood 25. Now, what would happen if we raised taxes and cut spending and paid the National Debt down to $0? At that point, if I understand correctly, there would be no treasury bonds, and therefore no treasury bonds held by the Fed. Would they just hold different types of assets to back the currency, or how would that work?
27 crossed with 26, which pretty much answers it.
And to anyone who didn't follow the exchange between me and Eliot, I now think that he was closer to making sense than I was, although I still don't think cash is part of the national debt.
The terminology doesn't really help with clarity. When the Fed or any central bank "prints money", in a QE sense, it doesn't actually print money. It increases the reserve balances of the banks from whom it buys the Treasuries. The money supply is increased, but not the currency suppl. Directly, anyway.
Okay, I think I understood 25. Now, what would happen if we raised taxes and cut spending and paid the National Debt down to $0? At that point, if I understand correctly, there would be no treasury bonds, and therefore no treasury bonds held by the Fed. Would they just hold different types of assets to back the currency, or how would that work?
In practice, very few if any developed economies have no government debt at all. I'm not sure if it's still the case, but certainly until 5 years ago or so Hong Kong had no debt for government financing purposes, but still did regular issuance for risk benchmarking purposes.
although I still don't think cash is part of the national debt. I do, in a way, the "national debt,"
Just this morning, somewhere, I read that "If you want to lose sleep at night, try to figure out what money is."
Gold isn't worth much to Mad Max.
Matter of fact, I happen to have some David Harvey (contra post-moderns) open right at a money section.
Not Harvey, he is too long to paste.
Money (cash, M1) is the symbolic representation of the totality of social relations plus the faith that those social relations will persist in their present form. Money is a "draw" on future production, and thus, in simple and subtle ways, a form of "debt."
There was a recent Planet Money podcast about the one time in history that the U.S. paid off all its public debt. (Spoiler alert: Bad idea!)
Fed could hold sovereign debt of non-us gov'ts. Does it work go China to hold non-China debt ?
Also, maybe I could get a grant to study possible Fed actions in the muni market.
Isn't eliot's point the entire basis behind MMT (or Chartalism)? From wikipedia, "budget deficits, by definition, are equivalent to adding net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector. This is represented by the identity: (G-T) = (S-I) - NX (G is government spending, T is taxes, S is savings, I is investment and NX is net exports). It is important to note that this identity is not unique to Modern Monetary Theory; it is an identity used throughout all macroeconomic theories, because it is true by definition."
In other words, the budget deficit equals the change in net assets of the private sector less net exports. And the integral of the identity should work too, i.e. the net government debt equals net private sector assets less the cumulative sum of net exports. If debt were zero, private sector assets could not exist unless you ran a trade surplus.
Saying net private assets wouldn't exist is very different from saying private assets don't exist. Also, you'd still have tangible assets, like land, machinery, and my devastating pecs.
Saying net private assets wouldn't exist is very different from saying private assets don't exist. Also, you'd still have tangible assets, like land, machinery, and my devastating pecs.
35:Well, you know, gov't debt is always also somebody's private asset (a bond), which is why MMT people like to talk about print and spend rather than borrow and spend.