Thursday, February 4, 2010

Interest on the debt equates to income to people



Interest paid by the government equates to income to people who own gov't securites.

When Ronald Reagan took office, interest income comprised 11.8% of personal income, but by the time his deficit peaked in 1984, it comprised 16.2% of people's income or a gain of about $300 billion.

In contrast, private wages and salaries went from 49% of personal income to 45% of personal income or a gain of about $430 billion.

So, interest on the debt was a huge part of personal income gains under Reagan. (More than 15 times dividends even though we had a huge stock boom!)

Today, even though the government is paying a record amount of (nominal) interest, it is only 10% of overall personal income, meaning that if we were to get back to the level that we saw under Reagan, the interest payments on the debt would have to go up by 60%. We're nowhere near that and won't be if interest rates stay this low and deficit reduction remains the policy focus.

65 comments:

Madball said...

Mike you really ought to write a piece on the Dollar bears/gold bugs and on Peter Schiff right here. Where is that idiot hiding now? What happened to all the "impending USD collapse" screaming of theirs?

googleheim said...

The dollar and the euro are taking turns showing off "weaknesses" and getting stronger / weaker commensurately.

This allows the euro boys to pay off their debts with a strong euro and then us in the usa to pay off our debts with a strong dollar.

A coordinated see saw approach to dealing with debts.

And / or what happened to the dollar as the cash and carry trade ?

and / or remember that Reagan spent more than all previous administrations combined, and perhaps even more than Obama in terms of adjusted scaling of inflation and percentages.

Krugman writes about the deficit hawks and their bs today

googleheim said...

Today's Krugman in a nutshell:

run up to iraq war was a liar's issuance, and run up against the deficit is same.

is any of this any different than how the kkk or backers of northern jim crow cried out when they were put to the test of real democracy and real understanding of freedom and equality ?

Mike Norman said...

Madball,

Yes, I thought about it and I thought about doing a video as well. What an idiot, you're right!

-Mike

Klusplatz said...

Mike,

You write this as though new money being printed to pay for interest payments constitutes some kind of wealth. Instead, wealth was merely transferred from one group to another.

What counts for wealth is the creation of goods and services, not money.

And you've got to stop misleading these people into thinking that deficit spending (destroying wealth) somehow creates wealth. That's complete nonsense and naive people who don't understand economics are liable to believe such nonsense.

That's tantamount to how Keynes argued that pyramid-building, earthquakes, wars, and dumping goods in the ocean would create more goods, and more wealth and prosperity. Besides just being nutty, this is threatens civilization itself.

Matt Franko said...

K;
If Medicare pays for healthcare services for an enrolled Senior Citizen (for instance by transfering a balance to an Orthopedic Surgeon who performs a knee replacement and submits a claim to Medicare), has any wealth been created?

I think these procedures bill at around $20k per joint and result in a huge increase in the quality of life of the patient after rehab.

Resp,

Mike Norman said...

Klutz: GDP (total output of goods and services) equals total national income. They're one and the same. That's an accounting identity. And, yes, new money is being "printed" to make those interest payments. Created, out of nothing. You're just embarrassing yourself here.

Ralph said...

Thanks to Klusplatz for pointing out that printed money does not equal wealth. The average ten year old has worked out that the intrinsic value of a ten dollar bill is nothing, zero, zilch.

The important point about money is that it is a token that lubricates the creation of, and the sale and purchase of real goods and services.

Sometimes the total stock of these tokens is inadequate (just like in a game of Monopoly). In this circumstance, it makes sense to print and distribute more (i.e. run a deficit).

Mike Norman seems to try and defend his position against Klusplatz’s criticisms by claiming that the money for interest payments is new money (i.e. printed money), thus (as I understand his argument) such interest payments are a net increase in income for the population.

This confuses two issues: deficits and interest payments.

When running a deficit it is TOTALLY AND COMPLETELY IMPOSSIBLE to equate any particular tranche of government spending to “THE” deficit. To illustrate with a simple example, if the deficit is $X a year, and the Navy cost $X and spending on highways is $X a year, does the deficit finance the Navy or highways? It’s a silly question.

Thus interest must be considered in isolation. Moreover, interest payments exist even when there is NO deficit, thus for those who don’t want to go along with the above “consider in isolation”, the question as to whether interest payments are a net increase in aggregate income must be considered in any case.

Here, Klutz is right. Interest on government debt is paid by taxpayers who don’t own Treasuries (or who own relatively few). The recipients are those holding a significant number of Treasuries. I.e. expanding these interest payments does not increase incomes in the AGGREGATE. (Which is quite separate from the question as to whether expanding the deficit expands incomes in the aggregate.)

Matt Franko said...

Ralph,
Boy, I must be lucky!

" ...Interest on government debt is paid by taxpayers who don’t own Treasuries..."

As a taxpayer, I've never gotten an invoice from Treasury holders to pay the interest to them. It must be a glitch in the system in my favor, I hope they dont figure it out!

Klusplatz said...

Matt,

As before, I’m afraid I don’t understand your point. Yes, taking money from one person to pay for someone else, helps the someone else. But it also reduces the total amount of goods and services being produced.

My whole point is the indisputable fact that printing money to spend destroys wealth on a net basis, it does not create wealth.

Klusplatz said...

Mike,

Embarrassing myself? You’re really one to talk.

I ask you too: what is your point with giving a B.S. Keynesian accounting identity that is not really an identity? It has nothing to do with what I stated.

You talk as though GDP means something. It is completely meaningless! Do you think that if you print 10% more money and thus raise the calculation called GDP by 10% as well, that you have created more real goods and services, and thus net wealth?

Do you understand that increasing the quantity of goods and services in the economy (REAL output), prices would fall? Do you understand that if you didn’t print money, prices would fall every year, real wealth would increase, but GDP would stay the SAME?

Mike Norman said...

Klutplatz, let me ask you something...tell me, what is the "money" that we take from taxpayers and others (foreigners) to "pay" for these things? What form does it come in? How is it denominated, etc? What is it, exactly? Can you describe it to me? Do we borrow yen? Yuan? Euro? Some other currency, perhaps? Gold? Taxpayers' individual IOU's? Please, enlighten me. (Feel free to answer too, Ralph.)

Mike Norman said...

Ralph,

You are right on one thing: Paying interest on Treasuries equates to welfare for the rich, absolutely!

Klusplatz said...
This comment has been removed by the author.
Klusplatz said...

Sorry all - My last posting I posted in the wrong place. I'll try to remove it. Otherwise, please ignore it.

Klusplatz said...

Mike,

Settle down - you're jumping around everywhere. You've got to stick to one topic and address it, then you move to another.

The topic on the table currently is GDP and wealth creation. Please address my comments and then we can move on.

Mike Norman said...

Nice try at deflection, Klutplatz. Now, answer please. Or is it that you are afraid to answer?

Klusplatz said...

You've got a lot of balls, Mike. I have asked you to defend several points, over and over, and you can't. You change the subject on me and fail to answer my questions, but when I ask you to come back and answer you accuse me of deflecting. Your credibility just keeps on shrinking.

You answer my latest question, and THEN I'll answer yours.

Klusplatz said...

And since you provoke me, I'll ask you for the fourth time, my original question: How can a price index increase before a money supply increase and how can a price index increase CAUSE a change in the money supply?

(this question is outstanding for over a week)

Mike Norman said...

Listen, Klutzplatz, this is your last time. I have been reading your comments throughout various posts and your main point is that the government can only spend what it taxes and borrows, so either answer the question I posed to you or be banned from this blog. What currency does the gov't tax and borrow in?

Matt Franko said...

K,

GDP is meaningless? I dont know if I will be able to overcome that one!

"Do you understand that if you didn’t print money, prices would fall every year, real wealth would increase," >>We're not under a gold standard anymore...

I could see your point if we were under a gold standard and increased the money supply without adding to the gold stores. Then yes, you would have additional dollars that would be convertible into the same ounces of gold as last year and that would be inlationary, and the opposite: if we didnt add to the money supply then an additional year's worth of product would be priced in the same amount of dollars as last year and prices would fall. this is all very interesting but is some sort of fantasy world of make believe.

this is not the world we live in since about 1971.

I think the answer Mike is looking for is "USD denominated reserve balances", (Mike please correct me here if I am wrong).

K, let me ask you: Do you think someone should be able to become "weathier" by just sitting on a pile of dollars or gold over a long period of time? I certainly do not.

Mike Norman said...

Yes Matt, but I want Klutzplatz to answer. What currency, money, funds, whatever you want to call it, does the U.S. government collect in the form of taxes or, borrows, in order to fund its spending?

Klusplatz said...

Listen, Mike, I will not be bullied, and you can’t ban me, and I will not let you get away with evading stuff – If you claim to know something, you must prove it.

But in the vein of being amiable and meeting you half way, I will address your NEW question:

You have obviously not read my posts with bubbleRefuge well. I have never claimed what you state above. I claim that the government cannot spend in excess of what it taxes or borrows WITHOUT, FIRST receiving money from the Fed—by way of having the Fed fund the banks who purchase the additional treasury debt.

To be clear, we both agree that the government (via the Fed, in my case) can spend as much as it wants, regardless of the amount it taxes or borrows (but who doesn’t agree with this?).

You, on the other hand, claim that the government can spend (in excess of its income from taxing and borrowing) BEFORE the Fed enables it to.

Thus, here is the new question on the table which YOU must answer: how can the government spend in excess of receipts from taxing or borrowing, BEFORE the Fed buys enables the banks to buy its additional treasury bonds?

Klusplatz said...

Matt, you don't have to have a gold standard for that. As I said, IF no new money was printed (i.e., if we kept the current fiat money supply as it is this minute), as new goods were created, prices would fall. That's mere first grade math.

As for the GDP comment, you should learn how that's the case. If you think GDP tells you anything about the real economy you're sorely mistaken

Mike Norman said...

"WITHOUT, FIRST receiving money from the Fed—by way of having the Fed fund the banks who purchase the additional treasury debt."

Yes, and I already addressed that by telling you it was a technicality made so because of a rule that says the Treasury cannot run a negative balance in its Fed account. Congress can change that, just like when they adjust the debt ceiling upward every time it is hit.

Mike Norman said...

BTW Klutzplatz, I CAN ban you, but it would mean requiring registration to all who want to read this blog and I want to keep it free and open.

Go back to Schiff. By the way, where is your buddy now that gold is crashing, Treasuries are rallying and commodities are hitting the skids?

Mike Norman said...

Meeting me halfway?? Ha! You don't want to answer my question because it completely destroys all of your arguments. Go ahead Klutzplatz, what "money" does the government collect in taxes or, borrows, so as to enable its own spending? Answer please, genius! Matt already gave you the answer. Okay, I'll give you the answer too...it's the U.S. dollar (dollar reserves), which the Federal Gov't has the monopoly power to issue. Therefore it is collecting or "borrowing" the money that it has already spent into existence. THAT is the only way that the non-government can get these funds. The gov't must spend it into existence first. It is, therefore, not borrowing anything.

Matt Franko said...

K,

"To be clear, we both agree that the government (via the Fed, in my case) can spend as much as it wants, regardless of the amount it taxes or borrows (but who doesn’t agree with this?)." >>>K, Who doesnt? Do you ever watch fiancial news on television? Id say the fact that you realize this puts you in the top 1% of true economic knowledge in this regard!

Look you're almost there...you need to stop paying attention to any sort of "money supply" as if it is something useful...The "money supply" has been going straight up and prices have been falling for equity, property, etc...

Klusplatz said...

Mike, you're playing games with me. You did NOT ADDRESS THIS! You stated that bubbleRefuge answered it, and I replied that he hadn't (anyone interested in proof can refer to the post "The Stimulus Didn't Work?"). I also asked you to copy and paste the answer if you really saw it.

Now, Mike, quit hiding, and explain this.

Klusplatz said...

Mike,

I am no Schiff follower. I do respect him, I think he's mostly right (though I disagree with many of his issues in his book, especially trade).

I would take him over you any day. But I am not a follower, and I haven't read one of his writings in about two years.

I am here to prove you wrong on my own. I don't need Schiff

Klusplatz said...

Regarding your dollar reserve point:

I don't know what you think you're proving here--I agree with you for the most part.

But you are wildly wrong for in a big way. The government does not always spend money that was already in existence.

The money the government spends that is monetized must first be created by the Fed, as I explained earlier. The Fed, via the banks, first creates the money, THEN the government spends it. The only time the Fed DIRECTLY funded the treasury, which resulted in the treasury having "high-powered money", where it actually created money, was during WWII. Except for that , the Government does not create money, the Fed does.

If you disagree, as I've told you for days now, YOU MUST PROVE HOW THIS CAN BE THE CASE.

Your credibility is on the line here: HOW DOES THE GOVERNMENT CREATE AND SPEND MONEY THAT DID NOT PREVIOUSLY EXIST, WITHOUT THE HELP OF THE FED???????

Klusplatz said...

Matt,

Thanks (I think).

You are right about asset prices, but that does not mean that the money supply does not mean everything - it does. You have to learn the different relationships and the various money transmission mechanisms.

Asset prices often fall or rise when money supply is static. Money flows into different places different times. For example, in the 70s it largely flowed into commodities prices but not into stocks. In the 90s, the opposite. In the 2000s, both. Recently, in the last year, money has flowed disproportionately into equities and not commodities.

IT can also flow into consumer prices and not asset prices, and vice versa. For example, since the early 80s, money has flowed disproportionately into asset prices. That's why, as you always year, it now take much more money pumping to create a dollar of GDP.

Also, you have to consider velocity and the volume of spending, as well as the money multiplier and who receives the new money and why and when they do or do not spend at certain times.

Klusplatz said...

I'm off - got a party. Will have to respond later if you reply.

Love,

Klusplatz

Matt Franko said...

K,

Applebees has an offer out now for a$5.50 Steak Dinner! How low can we go? That's the same as a 1/4lb.der combo at McDs!

The money supply must not be going up! Call the St Louis Fed! Their reports must be fabricated!

Klusplatz said...

P.S.

Matt, falling prices is not fantasy. It happened int he U.S. all through the 1800s (except when large amounts of gold were found, and when the government printed money to pay for the war). It also happened for 200 years in Britian after the start of the Industrial Revolution.

It would happen here tomorrow if the Fed (NOT the government, but the FED) quit printing money.

Plus, this also reveals how stupid is Mike's assertion that more money is needed for both the economy to progress and for full employment to take place. The economy grew faster and there was full employment (mostly) during these periods of falling prices (which is NOT deflation).

Mike doesn't understand that to employ more people, that you merely need to let prices fall (get rid of minimum wage and union laws). Instead of shelling out $100 to employ 9 people at a rate of $11.11 each, 10 people would receive the $100 at $10 each.

Mike does not understand that real wages rise not by having the nominal wage rise, but by having prices fall. that's what happens in a modern economy, it's just masked by inflation - prices of labor rise faster than prices of goods, because it's quanity is not increasing as fast (if at all).

Klusplatz said...

Matt,

As often is the case, not sure what you're saying. Plus, cherrypicked circumstantial observances don't prove or disprove a theory-you have to develop the whole thing.

IF you're disputing the fact that prices can only rise or fall with the money supply. You have to prove it. If you want me to prove it I will.

BUT, don't forget, as I just said, that at each level of money supply, velocity and the volume of spending affect prices. Both the volume of spending and the money multiplier have slowed dramatically.

Mike Norman said...

"The money the government spends that is monetized must first be created by the Fed, as I explained earlier."

Klutzplatz, you keep repeating yourself.

As I said, the involvement of the Fed ("monetization") is a technicality made so by an arbitary rule. Eliminate the rule and the Treasury credits bank accounts as it desires. The Fed would have to sell something to keep its interest rate from going to zero in that case. In other words, the Fed would have to remove funds (money) already created by the Treasury.

Ralph said...

Mike invites me answer his question: “where does money come from?”. My answer is the standard one: monetary base is created by central banks, and the commercial bank system leverages that up by a factor of ten or so, i.e. the commercial bank system creates much more money than central banks. But I don’t see the relevance.

Ralph said...

Klusplatz claims (just above) that unemployment can be cured by letting prices fall. Quite right: Keynes was well aware of that point in the 1930s. But the problem as he famously put it is that wages are “stick downwards”.

E.g. Churchill tried to reduce coal miners’ wages in the 1920s in the UK and a year long coal miners’ strike ensued: enormous economic damage. And for another example, look at the trouble Greece is having reducing bureaucrats’ salaries.

It is much simpler to cure unemployment by increasing value of the stock of money by increasing the NUMBER of dollars, rather than by trying to increase the value of each dollar. Of course this tends to lead to inflation, but if we keep the inflation to about 2% or so, what’s the problem?

Matt Franko said...

K,
Pick this up after your party, I'm posting between bouts of snow shoveling, 30"+ (DC area)...

Here's an excerpt from a post that Scott Fullwiler just made over at Warren Mosler's blog, Scott is a PhD Economist specializing in modern money systems at a Midwest University and sharp as a tack on this. Mike I believe had him as a guest on his show several times and that is where I was introduced to Scott's academic pubs that he has authored over the years. Very informative if you are one to prefer the reality of the current arrangements.

He explains it thus:
"To buy a Treasury, you need reserve balances, as that’s how they settle at auction. Where do reserve balances come from? From previous govt deficits (either already circulating or put into circulation when the Fed buys a Tsy security, which is obviously the result of a previous deficit). The only other option is to borrow the reserve balances from the Fed (repo, standing facilities, overdraft).

So, as we’ve always said, the funds to buy Treasuries come from previous deficits or borrowing from the govt sector. It’s not the case operationally that the govt sector is borrowing from the non-govt sector, no matter what silly gymnastics the Tsy is required to do by Congress when it runs a deficit."

I as a "layman" of course could not explain it better. If you think Mike is saying something not within Scott's paradigm here, then I'm sure you are misinterpreting.

Mike Norman said...

Ralph,

There is no multiplier and even your buddy Klutzplatz agrees on that one. Money multipliers are applicable under a gold standard, not floating FX/non-convertible currency.

The answer I was looking for was "dollar reserves," which can only be created by government spending. The government either collects back some of the money it already spent into existence (in the case of taxation) or, destroys some by selling securities so that interest rates are maintained at their desired level.

bubbleRefuge said...

Klutzplatz has already admitted that the fed-treasury hereby coined as the government-fed complex has the power to create unlimited amounts of money. He was also correct in that the treasury must create reserves by selling bonds (absent taxation) in order to maintain a reserve balance at the fed in order to write checks. He was wrong in saying the fed controls the overall supply of money( the fed manipulates reserves to maintain
interest rate targets.)
Dr Fulwiller has stated he is going to write a paper explaining the fed-treasury "gymnastics" involved in creating ever increasing reserve balances for treasuries fed account on the KC blog soon. But what Klutzplats doesn't realize by way of his admission is that by agreeing that the government-fed complex can create unlimited money he is about to become a post-Keynesian.


So what is the big picture as far as this discussion? We have all agreed that the government-fed complex has unlimited power to spend. So where does that leave us? How should the government-fed complex use this power?

Post-Keynesians argue, and what rational person would not, that this power should be excersized to benefit society by proactively managing the economy using fiscal policy to heat up or cool down the economy without fear of running out of money or leaving our kids to pay for it. IE FULL EMPLOYMENT AND PRICE STABILITY.

bubbleRefuge said...

BTW, I dispute this:
IF you're disputing the fact that prices can only rise or fall with the money supply. You have to prove it. If you want me to prove it I will. I dispute this because we do not agree on what money is. You have not shown that you have a full understanding of modern money by virtue of the fact that you said the fed controls the supply of the money. You seem to think that reserve balances have an effect on the supply of money in the system as evidenced by your previous post in the other article.
We can't go further without agreeing on what money is? Mike was trying to get you to clarify that.

Klusplatz said...

Ok, gang, I'm back.

First, and most important, my reply to Mike: Mike, you have offered, again, as an answer to my question, an incidental comment (a largely correct one) that does not answer my question.

Folks, let it be known here that Mike Norman cannot answer my question, and cannot support his claims.

Let me be very clear about this. Please refer to his youtube video:

http://www.youtube.com/watch?v=RenZi1DgI8g

View specifically minutes 2:45 through 4:50

He states, as he always does, that the treasury's spending creates new reserves. The actual fact is that the Treasury cannot engage in additional spending beyond what it has borrowed or taxed, unless the Federal Reserve FIRST issues reserves to banks who buy the NEW treasury bonds at auctions. Reserves come first, not government spending.

I've asked Mike over an over to explain just how the government/treasury can spend, once it's already spent taxed and borrowed money, BEFORE the reserves are created by the Fed. He simply can't do it.

Let it be known that Mike is preaching false, pseudo economics that he can't support.

Let me quickly give you examples of other things he says but can't support (even if he could APPEAR to support one or two, he could not support the rest):

1. For one person to be employed another must loose money

2. We need the Federal Reserve because the gold standard didn't work in the 1800s.

3. Increases in the money supply result from increases in price indices.

4. Government is a net supplier of savings.

5. Deficit spending creates wealth

6. Oil prices are driven by speculators

7. To employ new people, more money must be created.

The list goes on and on...

Klusplatz said...

Ralph,

You seem to know your stuff – real economics. Logical economics.

Klusplatz said...

"To buy a Treasury, you need reserve balances, as that’s how they settle at auction. Where do reserve balances come from? From previous govt deficits (either already circulating or put into circulation when the Fed buys a Tsy security, which is obviously the result of a previous deficit). The only other option is to borrow the reserve balances from the Fed (repo, standing facilities, overdraft).”

Indeed you need reserve balances to buy a treasury. But they do not come from previous government deficits. This is just plain ignorance. Once the government already has deficits, once it’s previous bonds have been bought, once the banking system is already used its reserves and has no excess reserves, once all the money previously created is out there in the system, HOW CAN BANKS BUY NEW AND ADDITIONAL TREASURY BONDS WITHOUT HAVING EXCESS RESERVES AND WITHOUT BEING ABLE TO CREATE MONEY!!!!!????? How could they pay for more and more bonds? How could the supply of government bonds keep on doubling and tripling by using currently-existing money to buy them, without all the money in the economy leaving other goods and services and assets and going solely into bond purchases? The only way this can happen is be the creation of NEW reserves by the Fed.

The argument above is the the same money that is existing in the economy (even though it did not used to), ban buy more and more and more things. There is never a need for new money, only for the same money to buy more and more bonds. In that case, the government only needs $1 to operate. 1$ can pay for everything it does because it will just keep using the same one dollar to spend more and more.

Klusplatz said...

“There is no multiplier and even your buddy Klutzplatz agrees on that one. Money multipliers are applicable under a gold standard, not floating FX/non-convertible currency.”

This is idiocy!!! With a fractional reserve banking system, there is always a money multiplier—both under a gold standard and today. Here is the Federal Reserve money multiplier:

http://research.stlouisfed.org/fred2/series/MULT

Do think they are just drawing a chart and making this up? Do you think that we don’t have a fractional reserve banking system? Do you think we don’t have reserves? Do you think we don’t really have a banking system? WTF!!!???

Klusplatz said...

“The answer I was looking for was "dollar reserves," which can only be created by government spending. The government either collects back some of the money it already spent into existence (in the case of taxation) or, destroys some by selling securities so that interest rates are maintained at their desired level.”

What is your obsession with “dollar reserves”?? Reserves can only be created by the Federal Reserve. (Do you understand the difference between the central bank and the federal government!!?? I know, the government can effectively control the bank, but there is still a difference. You really don’t know how the central bank works, do you?

Saying that the government creates money by spending is like saying consumers create gasoline by going to fill their car up at the pumps.

Klusplatz said...

“IF you're disputing the fact that prices can only rise or fall with the money supply. You have to prove it. If you want me to prove it I will. I dispute this because we do not agree on what money is. You have not shown that you have a full understanding of modern money by virtue of the fact that you said the fed controls the supply of the money. You seem to think that reserve balances have an effect on the supply of money in the system as evidenced by your previous post in the other article.”

Come on, man, just go to your local bank and ask them how things work. Or, go the Fed’s web site or pick up a money and banking 101 text book. You can keep making stuff up that is contrary to the whole economics profession but that does not mean you’re right.

Klusplatz said...

Just to be clear:

Reserves are not spent, but reserves enable banks to lend, and borrowers to spend.

bubbleRefuge said...

Ok, gang, I'm back.

First, and most important, my reply to Mike: Mike, you have offered, again, as an answer to my question, an incidental comment (a largely correct one)
that does not answer my question.

Folks, let it be known here that Mike Norman cannot answer my question, and cannot support his claims.

Let me be very clear about this. Please refer to his youtube video:

http://www.youtube.com/watch?v=RenZi1DgI8g

View specifically minutes 2:45 through 4:50



Ok I watched this. I didn't see anything incorrect in what mike said. Bear in mind, economics it is easy to get
terms confused when you are talking about money, reserves, the treasury, and the fed. Whenever the treasury spends,
it spends by having reserves debited from its reserve account at the fed and then credited to a banks reserve account
at the fed and then the bank turns around and creates a bank deposit for a private individual.

Here are the accounting entries:
Part 1: Klutzpatz get paid a 100 welfare check from treasury.
Treasury account at fed -100
Bank Of America reserve account +100
Bank of America treasury account at fed unchanged
Klutzpatz's personal checking account +100.
Bank of America total liability +100
change in monetary base(total reserves) +100


Part 2: the fed decides to remove the +100 in reserves in order to maintain the federal funds rate at targets

Treasury account at fed -100
Bank Of America reserve account -100
Bank of America treasury security account at fed +100
Klutzpatz's personal checking account +100.
Bank of America total liability +100
change in monetary base(total reserves) -100

So how should this be interpreted ? Does it matter? In part 1 the treasury added reserves to the system
In part 2 the fed took them out. But net net, there is 100 dollars in new deposits in the private sector, that
did not exist the day before.


He states, as he always does, that the treasury's spending creates new reserves. The actual fact is that the Treasury cannot engage
in additional spending beyond what it has borrowed or taxed, unless the Federal Reserve FIRST issues reserves to banks who buy
the NEW treasury bonds at auctions. Reserves come first, not government spending.
The treasury maintains a target balance of reserves in its account at the fed at all times. So it auctions bonds continuosly as needed for
this target. The fed will add the reserves to the monetary base in order to providing the funding for somebody to buy the auctioned
treasury. They fed does this by buying bonds and adding reserves to the system and the treasury takes them back out. This process
can be repeated ad-infinitem. So the treasury in conjunction with the fed can fill its reserve account as much as it wants and when
it spends, it adds reserve to the monetary base.

bubbleRefuge said...

“There is no multiplier and even your buddy Klutzplatz agrees on that one. Money multipliers are applicable under a gold standard, not floating FX/non-convertible currency.”

This is idiocy!!! With a fractional reserve banking system, there is always a money multiplier—both under a gold standard and today. Here is the Federal Reserve money multiplier:

http://research.stlouisfed.org/fred2/series/MULT

Do think they are just drawing a chart and making this up? Do you think that we don’t have a fractional reserve banking system? Do you think we don’t have reserves? Do you think we don’t really have a banking system? WTF!!!???

Calm down dude. Once again we are confusing words here. We do not have a fractional reserve banking system where money multipliers are applicable. We have reserve requirements and bank capital requirements. That is not fractional reserve banking in the textbook sense. For the 1000th time, Kluz, banks use reserves to clear checks from each other and to make payments to the fed and treasury. They don't play a role in lending

bubbleRefuge said...

Reserves are not spent, but reserves enable banks to lend, and borrowers to spend. How do reserves enable banks to lend? Its a vague statement

Klusplatz said...

bR,

I can’t keep going in circles with you. You (or these two non-economists you follow) are merely making things up. I have offered information to you from the Federal Reserve itself to prove my case. There are also textbooks you can read and any single college economics professor will explain it to you.

You have offered no evidence whatever to support the claims you are creating. When you can offer proof to refute my claims (which I have proved) then we will once again pay attention to your assertions, which cannot be found in any formal literature in the entire world.

bubbleRefuge said...

What constitutes proof? I can point you to papers, books, and bodies of literature written by PHD's that refute what you say. Where does that leave us?
start here.

http://neweconomicperspectives.blogspot.com/

here
www.levy.org

www.moslereconomics.org.
Dr Wray's book

http://www.amazon.com/Understanding-Modern-Money-Employment-Stability/dp/1845429419/ref=sr_1_1?ie=UTF8&s=books&qid=1265583972&sr=8-1

bubbleRefuge said...

Why don't you ever say anything on warrens blog?

Matt Franko said...

K,

Welcome back! Hope the party went well.

"http://research.stlouisfed.org/fred2/series/MULT

Do think they are just drawing a chart and making this up?


YES! That whole St. Louis "money supply" group should have been shut down when we went off gold. Sometimes welfare takes on many forms.

K, maybe you have earned alot of college credits in the past that taught you these old approaches to our monetary systems when we had a convertible currency, and you dont want to feel that your education dollars and efforts have been wasted because the US went to a different system in 1971. But this doesnt mean your education was wasted, "education is never wasted".

When legislation changes the legal structures of our government and it's institutions, we just have to now familiarize ourselves with the new laws and operations. This happens all of the time in environmental, labor, taxes, etc...It's not uncommon or unreasonable to have to "re-educate" ourselves to the new reality.

K, I suggest you invest some time at the links that bR has posted for you. It's better to know how the current arrangements really work rather than be focused on old N/A concepts of money and "wealth". You have your whole life ahead of you.

Resp,

Mike Norman said...

Klutzplatz states, as he always does..."The actual fact is that the Treasury cannot engage
in additional spending beyond what it has borrowed or taxed, unless the Federal Reserve FIRST issues reserves to banks who buy
the NEW treasury bonds at auctions..."


And it already has been explained to him 100 times that the Fed's role is based on a technicality that can easily be removed by Congress, in which case the Treasury would credit bank accounts as needed without the Fed having to provide reserves to buy securities.

But Klutzplatz is just dumb.

Mike Norman said...

Klutzplatz, dumbo, yo...hello!!! This has been explained to you six ways to Sunday already. Give it a rest.

bubbleRefuge said...

And it already has been explained to him 100 times that the Fed's role is based on a technicality that can easily be removed by Congress, in which case the Treasury would credit bank accounts as needed without the Fed having to provide reserves to buy securities.
Yes Mike and what he doesn't get, probably because he doesn't bother to study any of the new literature that we have taken time our valuable time to study, is that whenever the treasury department builds up its reserve account at the fed by selling bonds, the fed must ( they have no choice in the manner ) replenish those reserves back into the monetary base otherwise the fed will be violating their charter which is to maintain interest rate targets. So from this one can see that the treasury holds all of the cards, power etc, when it comes creating and destroying "money." As I showed with the accounting entries in a previous post, treasury spending creates private sector deposits whereas fed operations do not.

Klusplatz said...

Finally reading and addressing these….

bR:

What constitutes proof? I can point you to papers, books, and bodies of literature written by PHD's that refute what you say. Where does that leave us?

I already showed you proof mathematically in the previous post. If you want more I will email my detailed proof from my book.

No, you can’t point to anything that disproves that prices can rose ONLY via an increase in the quantity of money because it’s mathematically impossible. Instead of giving me a link to a blog that does not clearly show an article related to the matter, why don’t you summarize the explanation for me. Neither you nor others can prove that this fallacious notion.

Klusplatz said...

bR:

Why don't you ever say anything on warrens blog?

I don’t care about spending more time with incorrect theories on yet another blog that consists of misinformation by another non-economists who doesn’t know real economics.

But, if you identify something in particular you want my comment on, (preferably where “Warren” asserts one of these crazy made-up ideas), send me the link and I’ll comment.

I am (temporarily) on this blog for the reasons I explained before.

Klusplatz said...

Matt:

K, I suggest you invest some time at the links that bR has posted for you. It's better to know how the current arrangements really work rather than be focused on old N/A concepts of money and "wealth". You have your whole life ahead of you.

Matt, how old do you think I am? I was a baby in 1971. It seems that you think the things I’m saying are somehow outdated, but that you somehow have the correct theories. You are sorely mistaken. What I said applies to any time through history, and it applies to the future—real economic cause and effect does not change; they are not matters of opinion.

What I stated has nothing to do with “non convertability” (why don’t you just use the terms quasi-gold standard and fiat currencies?). I was talking about increases or lack of increases in quantity of money. This applies to the Fed and fiat money today. IF the money supply increases, blah blah blah. IF the money supply is static, blah blah blah. Do you think you have to be on a quasi-gold standard (We’ve never been on a full gold standard) in order NOT to print money and see prices fall?

I think it’s you who should spend some time studying. And by the way, I use about 1% of the knowledge I learned in undergraduate and graduate economics programs. Most of those consist of Keynesian B.S. and are valueless. I had to learn real economic on my own. I’ve spent over 20 years, 50 books, 1000 journal articles, and 10,000 hours doing so—all related to multiple schools of thought. Do you know any economics besides what you read on these non-economics blogs?
Instead of saying that my arguments are wrong, and tell me to go read somebody else’s blogs, why don’t you actually try to prove them wrong?

My assertions are correct and cannot be refuted. You all have merely asserted that I’m wrong, but none of you have attempted to actually rebut my arguments point for point. You can’t do it.

(p.s. Matt, I appreciate your courtesy and respect)

Klusplatz said...

Mike:

Sinking to the level of a child and calling names will not hide the fact that you cannot back up your idiotic claims (what’s next, a fight on the playground? (actually, I’ll take you on for that)).

You are a fraud.

By the way, Mike, dollar reserves are NOT money. Money is a medium of exchange that is used to constitute final payment. Reserves do not circulate in exchange for goods and services and do not constitute final payment. There are no market prices for reserves. They are RESERVES, not money.

Klusplatz said...

And Mike,

Even if you think that you've somehow answered my challenge on the Treasury/Fed issue by continuing to give vague replies that are NOT answers, how do you defend the myriad other areas where I have called you out for your ignorance of economics, and you have failed to defend your absurd arguments?