Wednesday, July 13, 2011

Let's end the "money printing, dollar debasing" argument once and for all.



This is going around a lot. It’s this ridiculous false notion that the Fed is printing money and that it has “debased” the dollar.

First of all, the Fed has NO ABILITY TO CREATE NEW MONEY. Only the government can do that via spending. The Fed can only affect the DURATION and COMPOSITION of financial assets held by the private sector. PERIOD!!

Now, on this point that the Fed “money printing” (NOT) has caused the value of the dollar to decline, let’s look at the facts.

Below I give you the US Dollar Index and the size of the Fed’s balance sheet.

Date                 Dollar Index Value             Fed’s Balance Sheet
3/14/2008            71.66                                        $921 bln
7/13/2011            75.24                                        $2.9 TRILLION!

So, here are the FACTS…over the past three years the Fed expanded its balance sheet by $2 TRILLION and the dollar went UP!!!!!!!!!!!!!!!!!!!!!!!!!

The lesson here: DON’T LISTEN TO THESE IDIOTS ON CNBC AND FOX OR ANYWHERE ELSE IN THE MEDIA!!!!!!!!!!!!

112 comments:

chrismealy said...

OK, dumb this down for me a little ... can you explain "the duration and composition of financial assets held by the private sector?" If I buy a bond from the Fed ... oh, wait, I think I've got it ... then I've turned my cash into a bond, changing the duration, but not actually creating any money. Is that right?

Anonymous said...

Can you source these numbers for us? I believe you but I like to be able to cite primary sources when I present info like this to other people to point out the stability of fiat.

Chaos said...

Most people who holds this is a goldbug, so they will say: "hey, look at gold, it's beyond 1500USD, who can't be the dollar be debased!".

You can't argue with this people. Is like if you said real estate is money and because in 2006 it was inflated USD was debased from "real estate standard". And they can claim that about a basket of fiat currencies ("all them are debasing!").

But for the common folk, who uses dollars as an unit of account, there probably isn't much debasing against other fiat currencies. Now, other thing is inflation and consumers purchasing power, which is what matters at the end of the day.

Also folks who can't save in money may be upset. I don't care much really because I think money is a medium of exchange, and it should guarantee to retain its full value with time (it's not a written rule), and you can save in other financial (or hard) assets over time to hedge against inflation.

Anonymous said...

Krugman is fond of pointing out that the real debasement took place during the Bush years.

But you didn't hear the cries of outrage then.

Why is that? Because there's a dynamic at play here: a black Kenyan atheist Muslim MARXIST SOCIALIST is in the White House and must be stopped at all costs before America becomes the next USSR.

What was ignored before, becomes a major issue now.

How bad something is perceived to be, is directly correlated with who is in the White House.

Matt Franko said...

Mike,
Had the CNBC via XM on this am and they cut to Santelli while Bernanke was Testifying; Santelli went off the hook, full berserker on Leisman. He was yelling and screaming, scary.... He may be finally losing it...

I'll try to find the link later and post it in this comment thread...

these networks do not look like serious news organizations when they air stuff like this... sad.

Resp,

Mario said...

thank you again for blasting the truth from the mountain tops. It's much appreciated and will be sounded through my "echo chambers" on this end. ;)

Can anyone explain WHY the US dollar has risen? Is it b/c as the more bonds are held by the Fed or anyone else, the currency gets more valuable and stronger? Or is it reserve currency action panning out or inflation expectations or what?

Of course, those that refuse to look at these facts and still insist that the dollar is debased will simply respond to you by saying, "Okay Mike, but guess what...this only means the dollar is going to crash that much more soon enough...just you wait Mike...soon enough it'll be coming...oh yeah...you betcha!" UGH!!!!

Mario said...

@ matt

couldn't agree more about how sad the media is...maybe this whole Murdoch scandal is going to "loosen" up their grasp on intelligence. I am praying!! LOL

Mario said...

@mike

Mike...you should try to get yourself onto the REAL NEWS NETWORK and talk about this stuff. They are a great internet broadcasting agency with a reputable and open ear to such ideas.

In fact they just had Michael Hudson on through a skype camera from NYC.

Try to get on there man!!! ;)

Here is a link for you: http://therealnews.com/t2/

Mike Norman said...

Anon:

I used the spot Dollar Index here and for the reserve balances you can go to the St. Louis Fed for this here: here.

Mike Norman said...

Mario,

I am familiar with them. The problem is, I am under contract at Fox and it precludes me from doing other networks, however, an internet network might be possible once in a while. Thanks!

-Mike

Mike Norman said...

Chrismealy,

Right. The Fed can only engage in asset purchases when attempts to influence the economy. So for example, it buys an asset from someone (a T-Bond) and then it replaces it with a reserve balance credit. The person is stripped of one asset--the bond--and gets a cash deposit. His net worth (assets minus liabilities) has not changed, however, he goes from a longer duration (a bond or note) to zero duration (cash). He also loses coupon income that would have accrued if he held the bond. No net new money was created.

Anonymous said...

so the Fed didn't create reserves or deposits when it bought MBS or treasuries

and so all the assets the Fed holds are also money

OK

Mike Norman said...

Anon: Yes, the Fed created reserves, but it took away the Treasuries. Both are dollar denominated liabilities of the Gov't. They just differ in duration (bonds have some duration, reserves don't) and interest (bonds pay more interest than reserves, which pay very little). The net amount of financial assets held by the public did not change. No net new "money" created.

Anonymous said...

This is literally the DUMBEST article I've ever read. OF COURSE QE is money printing - to say it isn't shows a complete ignorance of reality and economics. We have MASSIVE inflation (at least 8% currently) stoked by Bernanke. This article is literally an embarrasment

Mario said...

I told you they'd still come out of the woodwork Mike!! LOL ugh!!

libertarian89 said...

Mike that is an extremely weak argument. The dollar hardly went up at all over that time period. It went up against a basket of other fiat currencies some of which have their own problems and are being weakened by their own central banks.

If you want to look at the dollar index, look at the trend over the past 10 years. That tells a much different story.

Look at the dollar against gold. It has gone up significantly since then. Gold hit an all time record high today.

Look at the dollar against silver and in terms of other commodities like oil.

The dollar can buy you less of those commodities than it used to. So the dollar, in terms of gold and silver for example, as lost significant value. So the dollar has fallen over the past 3 years, and over the past 10 years. Just because the dollar index barley went up does not mean that the Fed’s policies over that time period did not weaken the dollar. Because they did. The index does not tell you the entire story.

Mike Norman said...

Mario,

Yep, LOL!!!

libertarian89 said...

not to mention the dollar falling against currencies like the swiss franc, the Aussie dollar, and the Canadian dollar among others.

there is plenty of evidence that the dollar has lost its value, not just within the last 3 years, but within the last decade as well.

Mike Norman said...

Libertarian:

So when Beanie Babies were going up in price parabolically during the 1990s it was a sign of inflation? And the Fed created that, too? By money printing??

Calgacus said...

What the woodwork-residents need to learn is that government bonds are just a kind of money. That currency is just a kind of bond, a kind of government debt.

Thinking monetary policy has real importance in comparison to fiscal, that the Fed does anything important compared to the Treasury is like:

Thinking that the change machine at a laundromat is the REAL profit center, the essential machine, not the washers and dryers.

Mike Norman said...

I just showed you the numbers. The dollar index GAINED value as the Fed added $2 trillion in reserves to the system. Are you saying that's made up or something?

PG said...

May I suggest that the expression "fiat/trust money" or simply "trust money" be used instead of "fiat money"?

The reason for such change is twofold: pedagogical and framing the debate in more precise terms.

At root, the nature of fiat money is trust money:
- Without trust it has no value.
- Fiat is an operational aspect; it cannot be fiat without being trust.
- It could be trust without being fiat.

Actually, the expression trust money is redundant. It could not be money without trust. For example, taking gold for money amounts to taking a merchandise as a substitute for money; or to confuse barter with monetary transactions. Kind of using cigarettes in a prison or concentration camp as "the most liquid merchandise" and calling them money. Using gold or cigarettes as a substitute for money always happens - and only happens - when trust is abused or imperiled.

The concept of the nature of money is not easy. Therefore, care, stress and perseverance should be exercised to make it clear.

Mario said...

@lib

on another topic do you know of a single statistic to show that businesses are "hanging out on the sidelines" and not hiring anyone until the government's debt to gdp ratio is lowered? I have yet to see or hear any evidence that would suggest such a thing.

What exactly is the ideal debt to gdp ratio to support business investment and what evidence do you have to suggest this?

Mario said...

- Without trust it has no value.

whether or not you "trust" the US dollar, you'll still have to use it to pay your taxes. Therefore this statement is false. Gold bugs may not "trust" the US dollar but I know for a fact it's the only that pays their taxes. No one is mailing gold wedges to the IRS.

libertarian89 said...

Folks the idea is that the dollar index is just one way of looking at how the dollar is performing. There is other ways to look at it.

There was a point in time where the dollar was about equal to where it was before the Fed added 2trillion to the system. I believe it was in the 71 range not to long ago, so, not much of a change if you just look at the index itself
But you can measure the dollar against other commodities or other foreign currencies to get another perspective of how well the dollar is performing.

Beanie Babies going up in the 90’s a sign of inflation? Well, we did have a speculative asset bubble in stocks called the nasdaq bubble during that time period. Maybe the “wealth effect” that rising stock prices have may have had an effect on superfluous spending on toys like beanie babies.

Or, it could have been just a random craze, just like power ranges or elmo. There are and have been random toy crazes throughout history, during good times and bad. Not sure what that has to do with the value of the dollar though.

Mario said...

But you can measure the dollar against other commodities or other foreign currencies to get another perspective of how well the dollar is performing.

right but doing that actually reveals more about THAT COMMODITY than it does about the dollar. That's why Mike used the beanie babies as an extreme example to prove a point to you. Chaos in this thread above made the analogy of the housing bubble as well to also illustrate the same point. Why you don't see this I cannot say.

Mario said...

There are and have been random toy crazes throughout history, during good times and bad. Not sure what that has to do with the value of the dollar though.

EXACTLY!!! That's the point we are making to you.

There was a time when silver was no where near $50 and gold was far, far below $1500. Their current prices are really just examples of another "toy craze" going on. That's all.

I always like to remind people that under fiat gold is still an asset just like houses, stocks, yacths, and even beanie babies so what's the big deal. Gold does not threaten the existence of fiat.

Adam said...

Gold didn't go crazy until GLD. Coincidence? I think not.

GLD is barely regulated. HAHA Gold is a bubble.

Anonymous said...

Re:
OK, dumb this down for me a little ... can you explain "the duration and composition of financial assets held by the private sector?" If I buy a bond from the Fed ... oh, wait, I think I've got it ... then I've turned my cash into a bond, changing the duration, but not actually creating any money. Is that right?

No, you have put your money into a savings account.

libertarian89 said...

No, you can see a pattern where a variety of commodities and foreign currencies are rising against the dollar. That means the dollar, in terms of those commodities and currencies, is falling in value. That has in fact happened.

Other currencies have not seen their currency fall in terms of those commodities to the same extent that the dollar has. The dollar is falling; it has been over the past ten years, and even three years.

The dollar has fallen in terms of oil over the past ten years, however, look at oil against gold; it has barley even moved in the past decade. So in real terms, oil is not rising, the dollar is falling. I don’t know why you folks don’t see that.

The supply of gold and silver are not being manipulated and being increased to the same extent the dollar is. So no, it does not tell us anything about that commodity it tells us that the dollar is losing its purchasing power in terms of those commodities. Those commodities are not just all of a sudden becoming scarcer; rather, the dollar is being more abundant. That is why the dollar is losing its value and thus its purchasing power.

No, gold and silver are not toy crazes. People want a store of value and don’t feel that fiat currencies can provide that at the moment as monetary policy is very loose around the world.

Gold is not a bubble. I remember some people saying that at 500, 1000, and 1500. Today it hit a record high. They are wrong. If anything, the dollar and the U.S bond market are in a bubble.


Not really sure why people are denying the fact that the dollar has lost its value of the past three years, and over the past decade. It has.

Mike Norman said...

Not to mention the fact that, over that period of time, the Fed did over $1 trillion of dollar swaps, which eliminated a MASSIVE bid that would have been in the market for dollars. So, without that intervention, the dollar would be much, much, higher even with the HUGE increase in reserve balances.

SchittReport said...

we are in an age where people can't read charts and interpret data properly (even though it is readily available via the internet)...

...and people ask why the US is in trouble?!

http://www.businessinsider.com/the-myth-of-the-exploding-us-money-supply-2011-3

Red Rock said...

Mike,

I am a firm believer in MMT, but comparing gold to Beanie Babies is a bit over the top. We can look back over nearly 80 years of history and see the inexorable if somewhat volatile increase in the value of gold from $35 to $1585. You can call this a bubble or a fad, but it would have to be the longest running bubble of all time and insisting it is seems to me a denial of reality.

As measured against almost anything but items directly benefiting from the march of technology, the dollar has and does depreciate over time. Can we live with that if the alternative is no growth? Probably, yes.

Finally, the increase in the price of gold the past few years is probably a reflection of many things. One reason could even be that savvy investors began to anticipate problems with the Euro several years ago and decided to diversify.

Personally, I may be a rare hybrid, a person who accepts MMT, but I also own a not insubstantial (as a percent of my investments) amount of gold. I'm not a "goldbug" but I'm not blind to the gradual depreciation of our currency as well as problems with the Euro that can be solved but the political will to do so may not exist.

Mario said...

Those commodities are not just all of a sudden becoming scarcer; rather, the dollar is being more abundant.

but what if instead demand for those commodities and other currencies is simply rising for a whole host of reasons? I am not denying that people are buying gold b/c they "THINK" the US dollar is broken...remember hyper-inflation last year? Yeah what ever happened to that?!?! LOL But what I am saying is that demand for those commodities is rising. Ok so what? Demand for things is always popping up somewhere with something. What's new?

As for historical charts, the US Dollar is actually pretty darn stable. Outside of the insanity of the early 80's, the US Dollar has basically stayed within a healthy 20 dollar range between 100 at the highs and 80 at the lows since the early 70's.

http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRUvoi.php?ticker=FUTDX

The Bush #2 years threw the dollar down to the lower ranges probably b/c of a combo of 9/11 (somehow), major government spending, cutting taxes, and the huge influx of "new money" from such loose lending and securitization practices. If one thing is for sure, we're not going to be seeing much inflation in the coming years as the politics and the credit markets and many analysts and stats are showing us all plainly today.

Ironically the US Dollar is really rather stable and "trustworthy" compared to most other currencies. Unless of course you'd like to be in the euro, which is doing just fabulously these days! LOL The Aussie dollar is really just tracking precious metals as of late and is way over priced and the Yen seems to be unwinding its carry trade. What's the prob bob?

Mario said...

We can look back over nearly 80 years of history and see the inexorable if somewhat volatile increase in the value of gold from $35 to $1585.

Just 10 years ago gold was trading at a mere $275...yeah 10 years ago...yup that's 2001. That to me speaks far more about the cyclical nature of gold (really any commodity) more than where gold was priced way back in 1950 or earlier when the world was a very, very different place for gold.

Personally I think the real denial lies in admitting that gold is just a commodity (sure a nice, shiny, pretty one but a commodity none the less) just like wheat or soy beans or what have you. And b/c of that fact "investing" in gold is really not possible b/c supply and demand play a part in its price structure at a fundamental level. Personally, I think the historical charts reflect this. But really gold can go to $5 million for all I care and it still says nothing about the validity of the US Dollar. It just says people like gold or think/feel they need to have it. Good for them...but somebody's always on the other side of a trade, it just has to be that way. Just my 2 cents on that one!

Everyone needs a house and they are so valuable...does that mean that in 2006-2007 when housing was so "valuable" we should have fixed our dollar to it? Why? There's just no need...we have something far better than that in my view...a non-convertible floating exchange rate system. Booyah baby!! LOL ;)

Gunther said...

The Euro and British Pound have the highest weight in the dollar index and they are two of the weakest currencies. The overvalued Euro was mainly responsible for the extremely low dollar index in 2008.

The dollar is at an all time low or close to it compared to the other currencies in the DXY, the JPY, CHF, SEK & CAD.

Furthermore, the dollar is making new lows compared to the Yuan, Singapore dollar, Australian dollar and New Zealand dollar.

You also took the lowest DXY value in 2008 to compare it to today. The DXY was around 88 one year ago in similar circumstances (European debt crisis).

The comparison becomes even more painful if you look at the DXY in 2002 when it was around 120.

Mario said...

The point for choosing 2008 was to show that QE didn't "debase" the US dollar. The fact that it was even higher at 88 as you aptly state is even more proof that QE didn't debase the dollar at all and that the swings and moves in the US dollar at not exactly tied to QE purchases nor are they tied to gold either ultimately. The dollar is on its own rhythm and needs to evaluated by that rhythm.

Plus if there's a US $ carry trade replacing the yen carry trade, then you can expect to see the dollar to be more range-bound as the yen was for about 15 years in a 20 point range between 80 and 100...it's interesting b/c ever since 2008 the US dollar has been in a 20 point range between 70 and 90 and funnily enough the yen popped past 100 and broke out of its range for 15 years. Just my thoughts on it anyway.

Mike Norman said...

Gunther:

A broader index of the dollar shows that it hardly fell at all in the past 40 years. See here

I used 2008 because in all the years prior to that the Fed kept system reserves pretty much stable at an average of around $14 bln and sometimes as low as a few billion $. It was after the Lehman crisis when the Fed really expanded reserve balances and that's the time also associated with the cries of "printing money."

Anonymous said...

Arguing with Mike is like arguing with a kitchen table. He has zero understanding of economics and obviously no common sense aty all. If he is right then why not do $20 trillion in QE and just give everybody the money - why not no mey is being created? Mike has a political agenda but he isn't smart or clever enough to make a coherent argument.

paulie46 said...

Anonymous…

"Arguing with Mike is like arguing with a kitchen table."…

Everything in your post is an ad-hominem attack.

Why not attack the ideas and try to logically dis-prove his premise?

Because you can't…

Matt Franko said...

Anon,

QE doesnt "give anybody money", it just exchanges some financial assets between the govt and non-govt and generally raises interest rates.

FISCAL policy is the method thru which we can 'give people money' so to speak...

Anonymous said...

Paulie - it's an attack because the premise is so UTTERLY STUPID that no logic can argue with it. How are these treasuries being bought? Who gave the fed the money to purchase them? The only difference between this and Weimer GErmant is the Fed CLAIMS it will drain the system at some point. Good luck - look what happened with Maiden Lane. Again if no money is being created and the dollar is not being debased as a result why not just do $20 trillion. The Fed IS creating money and it IS monetizing the debt - giving Congress UNLIMITED power to spend. If the Fed didn't pursue this idiocy rates would be higher and Congress COULD NOT Spend. Mike is not an economist he is apolitical commentator with no understanding of basic economics

paulie46 said...

Anonymous,

Your argument just comes down to "he said she said".

There are a lot of people posting here that agree with what Mike says and there are several that don't.

I happen to be one of the ones who agree.

If you are going to change my mind then you will have to make a logical argument using facts and refute the premise.

The premise here is that QE does not increase the money supply. Refuting this argument will require some logic combined with basic arithmetic and accounting.

Wildly waving your hands and throwing around phrases like "Weimar Germany" and "UTTERLY STUPID" is not going to change anyones mind that has spent any time thinking about this stuff.

You are wasting your and our time.

PG said...

@ Mario

- Without trust it has no value.

whether or not you "trust" the US dollar, you'll still have to use it to pay your taxes.


In what refers to money, it seems to me that one trusts people, not units of account or things as notes, coins or electronic bits (which happen to be physical records of the mental construct that is money).

If a government requires payment of taxes in amounts of a specified unit of account that surely will enhance trust on other citizens of the same state accepting and honoring the money expressed in the unit of account.

The spread of the "gold as money" meme can be linked to people losing trust in fiat/trust money, as a result of mismanagement of the common good that money is.

paulie46 said...

PG said…

Or it could just be hysteria.

Adam said...

We have MASSIVE inflation (at least 8% currently) stoked by Bernanke.

To boost your argument you make stuff up.

The BPP and CPI are exactly the same. 3.5%

Your number is more than double what everyone else the world uses. You are just lucky Gold is a bubble because of the same reason Housing was in a bubble. Leverage.

Adam said...

Employment Cost Index - Total Benefits is 3%

Employment Cost Index - Wages and Salaries is 1.6%

Where is the 8% number?

Gunther said...

A year ago, the USD appreciated 10 to 15% due to the crisis in Greece which can be explained by its safe haven status. However, during the past few months, the main benificiaries of the European debt crisis are CHF, JPY and gold. Why is that the case even when the Euro gained 20% against the dollar during the past year.

Why has the dollar lost its status as a safe haven?

paulie46 said...

"Why has the dollar lost its status as a safe haven?"

Has it? Who cares?

Tom Hickey said...

Based on the trade deficit, the US believes that the dollar is still overvalued by as much as 20%. Don't look for a strong dollar policy from the US while the trade deficit is high, other than by controlling domestic inflation. The US is fine with dollar depreciation and has actually been abetting it. But the key is the ROW willingness to save in the USD and that will continue as long as the US is the world's only superpower, the world's largest economy, and the global marketplace.

Adam said...

Hey Tom. What does ROW mean? I don't recognize.

Tom Hickey said...

"If he is right then why not do $20 trillion in QE and just give everybody the money - why not no mey is being created?"

Anonymous, you have no notion of how the monetary system works either in the US or globally. Who are you reading that you are getting this misinformation? Or it is just "common sense"?

Mario said...

I think ROW means "rest of world"

Tom Hickey said...

Adam: "You are just lucky Gold is a bubble because of the same reason Housing was in a bubble. Leverage."

Right, look at how silver collapsed with the margin requirement was raised. For gold not to be in a bubble physical gold would have to be bought with currency instead of derivatives financed with debt.

Mario said...

Based on the trade deficit, the US believes that the dollar is still overvalued by as much as 20%.

in other words the US views the trade deficit as falsely pumping up the dollar? probably by just as much as the yuan is held down b/c of their exports to us? It seems to me immaterial for the US to really care about this. The idea of a "balanced trade partnership" seems highly implausible in today's global economy. Do you think so?

Crake said...

“Why has the dollar lost its status as a safe haven?”

I do not know that it has. The Fed had an open windows for European banks to get dollars to settle dollar denominated liabilities, keeping them from outright buying dollars and causing the dollar to go up. The Fed extended that open window just recently. In other words, central banks, including the Fed, are actively keeping the dollar from going up during the Europe crisis. Absence that intervention (the Fed is price setter not taker, even in currency value it seems) the natural market would have the dollar going up.

“in other words the US views the trade deficit as falsely pumping up the dollar?”

Wouldn’t it be the opposite? The growing trade deficit would naturally put downward pressure on the dollar I would think. The crisis in Europe would do the opposite - push it up. If the dollar is pushed up the trade deficit would tend to get worse (cheaper to buy imports in US), so the Fed is actively keeping the dollar from going up (see above.)

Tom Hickey said...

The US believes that the US dollar is overvalued for several reason, the biggest and most obvious being the Chinese peg. The US believes that it needs to reduce the value of the dollar to increase net exports. The president has said that he wants to double exports in the next five years. This would require a significant dollar depreciation to accomplish in that time frame.

MMT would say that this is the wrong approach. The US is trying to increase jobs lost to net imports by increasing net exports. According to MMT, net imports is a benefit in real terns of trade. The US has the ability to fix unemployment fiscally and still enjoy the real benefit of the ROW (rest of the world) desiring to save in USD.

According to MMT, the deficit and debt arguments against the export strategy are canards with no economic basis.

Tom Hickey said...

Mario: "The idea of a "balanced trade partnership" seems highly implausible in today's global economy. Do you think so?"

The developed world needs to absorb the exports of the emerging world until they can build consumer economies. This is a real benefit for the developed world during this period. Enjoy it because it will not last forever.

The developed world other than the EZ has the ability to address the unemployment issue internally without concern for the trade balance. The EZ needs to get its act together quickly before it implodes.

Gunther said...

"Don't look for a strong dollar policy from the US while the trade deficit is high"

Tom,

How are you going to reduce the trade deficit if your currency loses value in an economy with 70% consumption with the majority consumed goods produced abroad?

How can you avoid fast increasing inflation?

Mario said...

The US has the ability to fix unemployment fiscally and still enjoy the real benefit of the ROW (rest of the world) desiring to save in USD.

agreed completely, however I am not so sure if JG program will really fill the UE gap that our trade deficit creates for us. It will definitely help. Maybe with the payroll tax holiday made "permanent"
would really be the extra kicker along with reliable fiscal spending. I don't know for sure. I'm just saying I agree completely but have some questions.

The developed world needs to absorb the exports of the emerging world until they can build consumer economies. This is a real benefit for the developed world during this period. Enjoy it because it will not last forever.

Right. And that really means that we DO have a balanced trade relationship with our partners however it is balanced out over TIME. If, and it's a big if, these emerging markets really stabilize then we possibly could export to them once they are serious consumers. I don't know what we'd be producing for them but time would tell. Like you say this "will not last forever."

One of the great things about MMT is that it allows for economic changes over time. Any situation can be managed appropriately under MMT simply by understanding and rearranging the sectoral balances accordingly.

Mario said...

Wouldn’t it be the opposite? The growing trade deficit would naturally put downward pressure on the dollar I would think.

with a trade deficit the importing nation is buying goods rather than making them. This usually leads to unemployment at home and therefore deflationary and therefore a stronger currency. The opposite is also true of a trade surplus. Exporting goods means more are employed doing stuff and hence inflationary. China and the US are really perfect examples of this.

As Tom has stated, MMT suggests that importing good is great for an economy b/c we get actual things by simply giving the exporting nation pieces of paper. A great deal for us. The only issue is that there can be UE and MMT also suggests a JG program and payroll tax holiday and proper fiscal spending to offset that. Tom also seems to think that eventually one way or another we'll have a trade surplus depending on how these emerging markets handle themselves. We shall see.

paulie46 said...

"How are you going to reduce the trade deficit if your currency loses value in an economy with 70% consumption with the majority consumed goods produced abroad?"

If the dollar declines our stuff is cheaper for them and their stuff is more expensive for us.

We buy less from China, spending more locally.

They buy more from us and…

What was your question about the trade deficit?

Mario said...

"How are you going to reduce the trade deficit if your currency loses value in an economy with 70% consumption with the majority consumed goods produced abroad?"

this doesn't make any sense. When a nation consumes goods from abroad that is deflationary and does not debase our currency. And to reduce the trade deficit we have to debase our currency so that our exports are at a more attractive price. I guess we want to get in the ring with vietnam, brazil, and china's currencies...God knows why!?!?!

apparently Obama and others seem to think the world will buy stuff from the US. Apparently we want to compete with China in selling gadgets...and debase our currency in the process...woo-hoo!! Sounds like a blast!!! LOL

We already export quite alot and unless we are going to become the authority in green technology, I don't think the world wants RCA televisions and steel much anymore. Do you think we'll see sweatshops here in the US soon enough!?! LOL But that's just my thinking on it.

MMT says maybe there's another way to approach (and skin) this cat....just maybe....

Mike Norman said...

“Why has the dollar lost its status as a safe haven?”

Reserve holdings of dollars is at a record high.

Gunther said...

"If the dollar declines our stuff is cheaper for them and their stuff is more expensive for us.
We buy less from China, spending more locally."

@Paulie,

Where are the factories? What are you going to produce? What about all the retailers that sell imported products? Do you really want the dollar to decline when you have a monthly 50 billion dollar trade deficit?

@Mario: I answered Tom who wrote "The US is fine with dollar depreciation and has actually been abetting it."


@Mike: I expected the dollar to gain after the tsunami and the escalation of the European debt crisis. It didn't happen.

paulie46 said...

"Where are the factories? What are you going to produce? What about all the retailers that sell imported products? Do you really want the dollar to decline when you have a monthly 50 billion dollar trade deficit?"

We sell plenty of stuff all over the world. If we don't get on the ball and start investing in green technology and alternative energy tech here at home we will be left in the dust regardless.

Buying gold isn't going to fix that problem and not sure what all that has to do with the dollar. It's a convenience, a medium of exchange.

We can spend a lot that money here. Instead of us buying flat-screen TV's and cheap chinese trinkets we could spend the money on schools, education, buy American when possible, improve our quality of life.

It's not an overnight adjustment we have to make. The trade deficit rose for three decades to its peak, last time I looked it had declined from it's peak quite a bit.

I'm not sure we couldn't run trade deficits in perpetuity anyway but…

paulie46 said...

Oh, and this…

http://thinkprogress.org/yglesias/2011/07/14/269393/us-china-trade-rebalancing/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+matthewyglesias+%28Matthew+Yglesias%29&utm_content=Google+Reader

Mario said...

I answered Tom who wrote "The US is fine with dollar depreciation and has actually been abetting it."

oh okay. Well then I guess we all agree that debasing our currency and becoming an export nation is not a great idea for the US.

Tom Hickey said...

"How are you going to reduce the trade deficit if your currency loses value in an economy with 70% consumption with the majority consumed goods produced abroad? How can you avoid fast increasing inflation?"

Ask the president. It is his plan, not mine.

Certainly, MMT does not recommend this approach, which will have unintended consequences.

Tom Hickey said...

Mario: "agreed completely, however I am not so sure if JG program will really fill the UE gap that our trade deficit creates for us. It will definitely help. Maybe with the payroll tax holiday made "permanent"

MMT economists are confident that adopting an MMT sectoral balance approach and functional finance can deliver this.


"And that really means that we DO have a balanced trade relationship with our partners however it is balanced out over TIME. If, and it's a big if, these emerging markets really stabilize then we possibly could export to them once they are serious consumers."

This is what the multinationals are banking on. A significant portion of their profit now comes from EM ops, and this is where they see the big growth coming from in the future.

Tom Hickey said...

"apparently Obama and others seem to think the world will buy stuff from the US. Apparently we want to compete with China in selling gadgets"

The US sells technology, both civilian and military. These are big ticket items.

The US should let the EM's supply it with gadgets and upgrade its economy by selling them stuff that is still out of their reeach.

Mario said...

This is what the multinationals are banking on. A significant portion of their profit now comes from EM ops, and this is where they see the big growth coming from in the future.

wow that's true. I can't believe I actually have some respect for the multinationals right now. That's actually cool you know.

The US should let the EM's supply it with gadgets and upgrade its economy by selling them stuff that is still out of their reach.

AGREED!!! If only we could get the libertarians on board with how government spending works we might be able to make a dash ahead of the world economies right now and start DOING NEW R&D here in the states rather than sitting on UE and figuring out how to speculate and securitize. Obama bailed us out alright...he bailed on us all with his initiatives. Man that one smarts a bit still. I'm not looking forward to 2012 b/c I can't stomach voting for either candidate at this point and to not vote isn't my style. :(

paulie46 said...

"I'm not looking forward to 2012 b/c I can't stomach voting for either candidate at this point and to not vote isn't my style."

A lot of us are in that boat now - hopefully some of the dust settles over the next year.

Maybe a surprise primary opponent or 3rd-party candidate for Obama thats actually electable.

Real long-shot

Mario said...

Have you guys heard of Australian Economist Steven Keen?

He knows of Minsky's works and seems to be on the ball with MMT, though he doesn't use MMT language. He's written some books destroying neo-classicism called "Debunking Economics."

Here's a worthy interview he just did with Max Keiser of all people, who does a wonderful job interviewing him to his good credit.

I encourage you all to check it out. Towards the end Steve makes an interesting observation that in the Great Depression businesses were in deeper debt than they are today and so deflated prices more aggressively in the 30's to drive revenues. Today it's the consumer that is more heavily indebted and that is why businesses are not dropping prices as easily as in the 30's and is also why the economy is doing better than some would think considering the huge levels of consumer debt. Very interesting and well worth a listen.

http://www.debtdeflation.com/blogs/2011/07/10/on-the-edge-with-max-keiser/

Tom Hickey said...

Steve Keen and MMT'ers don't see eye to eye on some key issues, basically related to accounting procedure. Steve is a Circuitist rather than a Chartalist, and all Circuitists but Steve are in agreement with MMT economists and vice versa.

Mario said...

Tom you are the man. You don't happen to have any links that further flush out those accounting differences. I'd be interested to see/hear the nuances.

SchittReport said...

dear mario,

please see the 3 videos i made from the steve keen interview you referred to:

http://www.youtube.com/watch?v=ZkBEq9P4TYg

http://www.youtube.com/watch?v=EDuwm5li9Vk

http://www.youtube.com/watch?v=HW6Z_j3R9_o

Tom Hickey said...

Mario; " You don't happen to have any links that further flush out those accounting differences. I'd be interested to see/hear the nuances."

I don't have a single reference in mind. Basically, Steve has a novel view of macro that involves including debt in the equation. In describing this, he changes standard accounting procedure to account for his theory. MMT economics object to this, holding that it isn't necessary to depart from accounting SOP and doing so harms the case more then helps. I.e., you can't just make stuff up to suit your theory and expect to be taken seriously.

Options Trading Investor said...

Mike, I posted this link to swiss franc and gold forex charts on another post but it is more relevant to this discussion.

Options Trading Investor said...

The dollar index went UP Michael, because OTHER COUNTRIES PRINTED AND SPENT MONEY FASTER.

See the charts in my previous comment to see where the money has REALLY gone.

paulie46 said...

for the skeptics if anyone is still reading this thread…

From Bernanke's presser:

Congressman Sean Duffy: We had talked about the QE2 with Dr. Paul. When — when you buy assets, where does that money come from?

Ben Bernanke: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.

Congressman Sean Duffy: Does it come from tax dollars, though, to buy those assets?

Ben Bernanke: It does not.

Congressman Sean Duffy: Are you basically printing money to buy those assets?

Ben Bernanke: We’re not printing money. We’re creating reserves in the banking system.

Mario said...

good stuff shittreport...love that name man!! LOL

thanks Tom. I got a link over to Bill Mitchell's blog that apparently is where Steve and Bill had a discussion. I could only glance at it so far, but I did notice your name in the comments (of course!). LOL

http://bilbo.economicoutlook.net/blog/?p=5194

Full Employment and Stable Prices Party said...

Isn’t a gold standard currency, as generally construed, just a subset of fiat currency? There is still a monopoly issuer of dollars, and the dollars enter circulation through the purchase of gold. The dollar “earns its way” by extracting a dollar’s worth of the labor and other mining and refining resources required to deliver gold bullion to the Treasury. And we would say that our reserve of wealth has increased. One more dollar in circulation, one more dollar’s worth of wealth created. The ratio of dollars to wealth is constant and therefore not inflationary in any sense of “debasing the currency”.

So now I wonder how this is different than the post-gold standard currency. The monopoly issuer of dollars now adds to the dollars in circulation by purchasing not gold but anything in the private sector that directly serves public purpose: a soldier’s salary, an elderly person’s healthcare, a repaired road, a child’s education... Each dollar still earns its way into circulation by extracting a dollar’s worth of resources from the real economy and converting that to wealth. Again, the ratio of dollars to wealth is constant, which cannot in itself be inflationary.

In both cases, someone got a dollar’s worth of income, and a dollar’s worth of wealth was created. So long as we can buy a dollar’s worth of stuff for a dollar, we should be able to continue spending, irrespective of taxing or borrowing. Of course the challenge always remains to make wise decisions about what we the people buy through the federal government as our agent.

Tom Hickey said...

Gold doesn't actually determine value any more than paper. Like paper, gold is only valuable because it is traditionally valued. It has low use value. Gold really adds nothing other than a volune constraint on money creation, designed to curb inflation. As MMT shows, this is a poor argument and a poorer strategy.

On a gold standard with 100% reserve banking the money supply would be fixed to the amount of gold. Add fractional reserve banking and more credit money can be created than the backing.

Gold bugs would like to a a return to the gold standard and 100% reserve banking. That would fix the amount of money to the gold supply and it would be impossible to to grow the economy beyond those limits. It would result in lowering real wealth creation, economic development and the ability to address sectoral balances fiscally. The limitation on government spending would result in inability to increase fiscal deficits to offset saving desire. This would force contraction.

Moreover, a gold standard internationally would provoke a return to mercantilism and historically mercantilism has led to exploitation and war. Bad scene.

Craig Austin said...

@FESPP

Gold-backed currency constrains the currency issuer lending by attaching it to arbitrary political constraint - gold reserves. A nonconvertible fiat currency does not constrain lending. Lending by a currency issuer is desirable in order to properly manage the currency supply. For example, a balance budget should never be the goal of a currency issuer. Fiscal optimization at any level of public spending of a currency issuer requires balancing tax revenues with spending while running deficits at a rate corresponding to users saving rate. For those of you interested I’ve outlined a laymen's explanation here

Full Employment and Stable Prices Party said...

So is it a useful formulation to say that gold standard currency is simply a more restrictive and less useful type of currency than our current system with voluntary constraints like debt ceilings and borrowing equivalence, or than full-on MMT, and not a horse of an entirely different color?

Does the notion of the new dollar earning its way into circulation do anything to help dispel the inflation hysteria of the "printing money" crowd?

Like Craig Austin, I have a particular interest in the metaphors and semiotics of persuasion required to insert these ideas into the mainstream.

Tom Hickey said...

FEAOSP, the gold standard is a completely different monetary system from a fiat system. It is a convertible fixed rate system, while fiat is non-convertible floating rate.

Countries that adopt the former give up currency sovereignty in doing so, and they are limited as to what they can do domestically using monetary and fiscal policy, which has to be used to manage reserves wert the rest of the world.

In a non-convertible floating rate system, the country retains currency sovereignty and can use its advantages to manage domestic economic policy. The floating rate currency self-adjusts in markets to conditions in the rest of the world.

This is a huge difference and a convertible fixed rate system involves high price to pay supposedly to control inflation, i.e., preserve the value of money as a store of wealth.

Political restraints do not alter the operational reality of the monetary system in place, they just create conditions that make it difficult or impossible to use some of the advantages of the system, in the case of a fiat system, to impose "fiscal discipline." But it is still a fiat system and functions as such. Even with the political restraints, the US doesn't actually fund itself with taxes or borrow to finance spending, although it is made to look as if it were.

Under a convertible fixed rate system like a gold standard, government actually has to tax and borrow to fund itself, or it will encounter reserve issues because reserves are real (gold). This does not apply in a fiat system because reserves are just numbers on spreadsheets.

Full Employment and Stable Prices Party said...

Tom, thanks for your responses. You're being patient with me and I think I've failed to make my point. I believe I have a pretty good grasp of the differences between gold standard and fiat currencies and an increasingly good grasp of MMT at-large (I score pretty well on Bill Mitchell's Saturday quizzes). What I wanted to explore is whether there are similarities that address what federal spending actually is, that might be useful in bridging the persuasion gap for those who believe gold standard dollars are "worth" something but that fiat dollars are not, and that spending a gold standard dollar is not inflationary but spending a fiat dollar is. So many folk have the vague notion that rising prices in specific or in general is a result of the federal government "diluting" the money supply but when pressed cannot conceive of a mechanism by which this actually occurs. There is similar ignorance of the fact that federal spending occurs in the private sector, creating jobs and a significant market for useful and desirable goods and services. You know this, of course, and I cite these examples only to illustrate the persuasive difficulties that MMT is hard up against. If my metaphors and analogies are unhelpful, I'll abandon them and try to find something better.

Craig Austin said...

@FESEPP

A gold-backed dollar served it's purpose but is a relic of the past. The modern economy is digital and our money should be likewise. The current mess we are in is groupthink - simply a colossal operational management failure. Mainstream economists have misunderstood monetary operations for 40 years. Fix our currency management and poor banking structure and everyone's standard of living will increase.

Metaphors are helpful but they can quickly get a way from you when a critic is trying to punch holes. in my mind the safe way of explanation is using the right language and stick to talking points. What I'm trying to do is to build a platform of talking points that explain our system clearly and concisely. What we are collectively lacking is confidence and trust in our system.

Craig Austin said...

@FESPP - "What I wanted to explore is whether there are similarities that address what federal spending actually is"


The federal government creates money, or government liabilities, through public spending. Once dollars are in circulation all user transactions net to zero because all asset transfers are offset by a corresponding liability transfer. At the end of each year taxes transfer dollars back to government which reduce government liabilities. When both parties sum their totals the issuer debt is dollar for dollar equal to the users savings. Government operates independent of it's users by creating money when it spends and destroying money when it taxes. Government deficits of the issuer results in savings by the currency user as a matter of accounting.

Calgacus said...

FEAOSP:Isn’t a gold standard currency, as generally construed, just a subset of fiat currency? ... Each dollar still earns its way into circulation by extracting a dollar’s worth of resources from the real economy and converting that to wealth. Yes, that is right, FEAOSP. All your observations are correct. Money intrinsically and essentially is and always has been fiat money, a form of debt. A gold standard just sets the price of gold in terms of currency, and thereby puts an artificial constraint on it.

MMT applies to all monetary economies, commodity standard or not, capitalist or communist. The JG is just the ideal method of stabilizing currency value and increasing wealth - by putting the economy on a labor standard, rather than a gold standard.

Tom Hickey said...

FESPP, there are two problems in dealing with gold bugs. First, they believe in the strict version of the quantity theory of money which says that an increase in the money supply translates into a corresponding increase in prices. No serious economist still thinks this. I has been diproven empirically and and rests of the unreasonable assumption that velocity of money and number of transactions are constant across time, which they manifestly are not. It's just silly.

The larger problem is that with gold bugs, gold is a fetish, and it is near impossible to get people to abandon their fetishes.

Ask them that if the amount of money remains constant over time, fixed by the gold supply, how they expect growth to be funded.

Also, when they point to a chart showing how money has declined in value, say, since the inception of the Fed in 1913, a favorite of theirs, ask them what happened to GDP over the same time frame. Are people better off now than they were in 1913? Is the standard of living lower? Request them to explain exactly what are they complaining about and what the problem is for them now? They will say, "hyperinflation," which is silly. They cannot give a cogent answer, and will just point at the chart again.

Mario said...

the other thing with gold bugs is that most/many are libertarians. And libs just despise the thought that government "controls" private sector wealth by how much it spends and taxes.

Libs are desperate to think that the private sector is the ONLY PLACE where wealth begins, ends, and grows. Anything with the government is by definition evil and terrible and leads to problems. It's just that simple for them and they are NOT budging...even when they go visit a national or state park, take a dip in the ocean, or get a paycheck from a company that more than likely receives some type of government aide, subsidy, or contract. Once you track supply chain dynamics, it becomes even more likely that most businesses are directly or indirectly benefiting from the government, and our economy's breakdown shows this to be true anyway. Let alone the fact that the government creates all money in the first place. These are all sacrilege to libs...let alone the fact that bubbles came and went to the extreme under the gold standard as well, so the "limitations" of the gold standard really don't do anything but straight jacket ourselves...they do NOT change human sociological tendencies in an economy of scarcity. Period. Regulation of course would greatly help in that regard, but again, this seems to be another evil statement issued from the bowels of the great inferno.

It's all a childish game for them playing make-believe cowboy and indian games, where I'm the good guy and you're the bad guy now let's fight it out and if I get shot all of a sudden I have an invincible cloak and you can't kill me...now I shoot you and bang you're dead! Game over. Let's play again and make up the rules in my favor as we go along as things don't exactly "pan out" the way I want them to. LOL It's nigh on impossible to discuss things with such people, and unfortunately they are very magnetic individuals and their message is so seemingly simple and "obvious" that others are receptive to it. I can understand since most people really don't care about the difference between the Treasury's balance sheet compared the Fed's and what a primary dealer is and how reserves work and what nfa is anyway. People's eyes roll over almost immediately with this stuff while at the same time our "economists" simply don't want to look at the cold hard facts about these things. This leaves us truth-seeking folk stuck between a rock and a hard place. We may just have to go along for a ride here and hopefully keep the communication alive and well all the while and eventually maybe people will start to catch on. Nothing is more transformational than pain and suffering. As my one friend says, "When you're sick and tired of being sick and tired, you'll change." Meanwhile we'll just keep pushing the MMT drink across the bar all the live-long day...sooner or later someone's going to come have a drink. ;)

Tom Hickey said...

Calgacus: "Money intrinsically and essentially is and always has been fiat money, a form of debt. A gold standard just sets the price of gold in terms of currency, and thereby puts an artificial constraint on it."

While this is essentially correct, the term "fiat money" is generally applied to non-convertible floating rate currencies.

Your point is correct because convertible fixed rate currencies backed by commodities like gold don't get their value from the commodity, which serves as merely a fetish disguising the fact that all money is debt-based, i.e,, as someone's asset, it is someone else's liability.

"1. As Clower (1965) famously put it, money buys goods and goods buy money, but goods
do not buy goods.
2. Money is always debt; it cannot be a commodity from the first proposition because if it were that would mean that a particular good is buying goods.
3. Default on debt is possible."

"Money" by L. Randall Wray, Levy Economics Institute of Bard College, Working Paper nol 646, Dec 2010.

Full Employment and Stable Prices Party said...

@Calgacus – Thank you for your confirmation. The FESP Party platform has as a prominent plank (how’s that for alliteration?) the Job Guarantee, which I’ve been distributing to elected officialdom and policy- and opinion-makers in the U.S. as best I can.

@Tom – As you point out, there can be a perverse pleasure in baiting gold bugs, but I am not interested in persuading them. They are convicted and largely immune to opposing views. The action is in the Great Middle, that vast majority who either have never thought about these things or who have been captured by the gold bugs’ rhetoric and imagery (e.g., the ubiquitous household analogy) but without any real ideological, professional, or emotional attachment. The content and form of effective persuasive techniques for this audience needs a lot of attention.

@Craig – I submit that language is metaphor and that effective persuasive communication requires a crafting of language that starts where the audience is now, and brings them along to where you are. Straightforward language from one’s own perspective is often ineffective because there are not common referents in the words and ideas we use. The problem compounds with abstraction, and many of the terms used in the MMT community (and socio-econo-politics in general) are high-level abstractions that can require a lot of work to identify and agree upon common referents. It’s certainly not one-size-fits-all. We need a whole lexicon of vocabulary, analogies, data, stories, and other techniques to draw upon for this work.

It is not casually that the word “paradigm” is applied to the MMT perspective. There is a gestalt-like shift that occurs when one “gets” it. It’s like suddenly seeing an optical illusion the “other” way – you can’t go back and only see it the way you did before. This shift is a very difficult thing to try to educe from someone.

Tom Hickey said...

@ Mario,

Right, Austrians generaly deny "2. Money is always debt; it cannot be a commodity from the first proposition because if it were that would mean that a particular good is buying goods." They hold that "real money" is a commodity and all transactions are then reduced to barter transactions. A. Mitchell Innes refuted this position in his articles here.

Mario said...

It is not casually that the word “paradigm” is applied to the MMT perspective. There is a gestalt-like shift that occurs when one “gets” it. It’s like suddenly seeing an optical illusion the “other” way – you can’t go back and only see it the way you did before. This shift is a very difficult thing to try to educe from someone.

so true and I totally agree with you and think that your search for fitting analogies and metaphors is a great idea and a worthy venture. God speed to you good sir!!!

And of course share whatever you learn with us and we'll spread the word too!

Calgacus said...

@Tom:While this is essentially correct, the term "fiat money" is generally applied to non-convertible floating rate currencies. Yes, but that does not remove the fact that "fiat money" or credit/debt is the essence of "money". Money is born fiat, yet it is everywhere foolishly constrained. :)

Thinking of fiat money as "non-convertible floating rate", rather than what money is is as strange as talking about ordinary people as "non-muzzled un-straitjacketed" people. Having a special word for this ordinaryness, and over-restricting it, creates the misleading impression that there is something restricting the universal application of the theory and sows needless confusion and doubt in people like FEAOSP.

The MMTers and other post-Keynesians and institutionalists have done a great job of cutting away the BS in economics. But they should step back and look at still unnecessarily complex and confusing terminology, the organization and exposition of their theories, and the residue which remains from the "dark age of macroeconomics" which creates a great barrier to understanding.

They haven't, and some leading MMTers are worse than others in their inattention to, or bad choice of language, or worst of all bad theories of how language should be chosen. There are philosophical papers on concepts - But they aren't sufficiently applied to shorten and clarify, as they easily could be. Taking the time to write short letters - even more than Abba Lerner did, who was great at this difficult task, would reap enormous dividends.

googleheim said...

I just wanted to leave the last comment on this thread since it is the longest ever on this blog with the biggest number of entries !

Tom Hickey said...

Sorry, googlehiem, it ain't over until ther fat lady sings.

@ Calgacus

Agreed

Shaun said...

Hi,

I have some questions. TIA

An increase in the money supply is caused by the Fed purchasing assets ?

And the majority of these assets are U.S government backed securities. Then this would mean; Government issues debt -> Private holder -> Central bank. Is that correct ?

And to combat deflation the money supply in the economy would need to grow over time ?

Therefore the account reserves of federal banks will need to increase over time?

Tom Hickey said...

QE increases bank reserves (monetary base). The money supply is endogenous and is chiefly influenced by private lending. There is no transmission mechanism between reserves (monetary base) and money in circulation.

If non-banks sell tsys during QE, their deposit accounts get marked up, and that is an increase in the money supply. But that money has to be spent to have an effect. Instead of that happening, it has been saved in other financial instruments, often using leverage, and this has likely contributed to the rise in some asset prices, like equities and commodities.

Monetary policy is not effective in addressing either inflation or deflation because it doesn't affect the amount of non-government net financial assets, hence, effective demand.

Interest rate management and QE have not been successful.

Shaun said...

Thankyou Tom for responding to my question.


Sorry I'm not well versed in economics. I am a programmer and have taken an interest in Bitcoin, which is a crypto-currency. Hence I wish to understand how the current currency system works in order to understand the flaws of Bitcoin. Possibly the knowledge gained here will help to refine Bitcoin, which may lead to the evolution of a new currency system.


Anyways, it seems I should have been using the term "monetary base" rather than money supply.

Lets see if I understood what you said correctly. The Central bank will increase its reserves in order to increase the monetary base. This is achieved by the Central bank purchasing assets and in turn crediting reserve banks. From this the money supply increases that is related to the monetary base by some ratio ?

Tom Hickey said...

"Lets see if I understood what you said correctly. The Central bank will increase its reserves in order to increase the monetary base. This is achieved by the Central bank purchasing assets and in turn crediting reserve banks. From this the money supply increases that is related to the monetary base by some ratio ?"

Not quite. The Fed issues reserves as it liabilities in exchange for an asset, usually a tsy. When the Fed buys a tsy, then the tsy is added to the Fed's asset account and reserves are added to its liability account. The bank selling the tsy markes down its tsy asset account and marks up its bank reserve account, also an asset. This relfect a change in composition and duration of the bank's assets. This keeps the amount of tsys the same, with ownership changing from private to public. The Fed reserves increase, which adds to the monetary base.

There is no transmission mechanism from the monetary base (bank reserves) to the money supply (credit money) because banks do not lend out reserves nor do that lend reserves. They must have reserves to settle and also to meet the reserve requirement. The reserves are obtained after a loan as created a deposit.

Mario said...

@ shaun

"The Central bank will increase its reserves in order to increase the monetary base. This is achieved by the Central bank purchasing assets and in turn crediting reserve banks. From this the money supply increases that is related to the monetary base by some ratio?"

As I understand it it'd would be more apt to think of the CB as just creating reserves out of thin air. Poof!! Reserves exist!! They can do this b/c of the treasuries that are owned by Primary Dealers (aka big banks essentially). The PD's got those treasuries b/c they bought them from the Treasury whenever the government spent. The Treasury is apparently by law not able to use dollars so they use bonds instead and they are also not able to sell directly to the Fed their bonds, so they go through Primary Dealers which marks up the Treasury's account at the Fed. It's basically a big old kabuki dance that gives banks tons and tons of free money for doing nothing whatsoever. So anyway, the Fed buys those treasuries that are owned by the PD's and that creates reserves (digital cash) for those PD's now. The PD's gave up the treasuries and now got cash instead. This lowers the fed funds rate b/c their reserve levels are higher now...however nothing has actually changed in the ACTUAL economy b/c buying and selling treasuries between the Fed and banks doesn't help Joe-on-the-street be able to now afford to take out a car loan for example. His income level is still the same...unless he has good credit and wants to just get something he can't afford (aka that's unsustainable).

I think it's fair to think of the monetary base as an infinite source so long as there are treasuries in the system for the Fed and banks to exchange. It would be interesting to think of a scenario where if the government did balance its budget such that no more treasuries existed in the system (that would mean no more spending at all I guess) or at least that there were not enough treasuries in existence for the Fed and banks to properly achieve a target rate...is that even possible of occurring? Does anyone know about that by chance?

I find it humorous when people say "the debt is 14 TRILLION dollars. That's huge man!!!"...it reminds me of a child looking up at the stars and trying to conceive of exactly how many are up there. What's that number man?!?! It's all very innocent, naive, and cute. LOL

So the Fed's liabilities in terms of reserves issued to banks doesn't really matter and it really doesn't matter for the Fed if those loans default b/c they can always just make more reserves...it does matter for that bank however if the loans default though (unless of course Uncle Sam lends a hand!!!). Ultimately though what always matters is the quality of the loans the banks are making. QE 2 does nothing b/c it is simply the process of exchanging treasuries which banks own for digital cash which the Fed gives them. That's all. It's really no different than the Fed setting the target rate. I think the difference with QE 2 was they were apparently targeting treasuries further out on the curve in an attempt to effect mortgage rates and investor confidence in the USA or something like that. LOL

Maybe that'll help clear things up for you Shaun. If I'm off on any of this feel free to chime in someone.

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art said...

Tom Hickey, re "Gold doesn't actually determine value any more than paper. Like paper, gold is only valuable because it is traditionally valued."

I'm not sure we should dismiss it that easily. Milton Friedman's commodity theory of money, which may have as its basis a brief footnote in Frank Knight's Risk, Uncertainty and Profit, comes closer I think. And they're empirically supported by Summers and Barsky's paper on Gibson's Paradox and the Gold Standard. The idea is that gold stocks accumulated at a pace that approximated that of real capital accumulation over a long period of time, implying appropriate additions to the monetary stock, accomodation of normal savings desires, etc. Of course, it did a pretty lousy job of it over anything but the very long-term, and then only if you chose the correct endpoints. Otherwise it was usually a chaotic process with long-term shortages of gold and resulting recessions and depressions punctuated by a few large discoveries.

But rather than brushing gold aside, I think it offers an intriguing way to finally get MMT or similarly sound schools of thought into mainstream macro. Once you get your head around the fact that (1) gold mines had to run perpetual deficits of gold, (2) cumulative gold output was not in any way a liability of gold mines, and (3) sovereign govts now occupy the role that gold mines once played, then the rest should fall into place, I think. That's how the MMT bulb switched on for me, anyways.

art said...

Mike, I agree that the Fed doesn't net add to financial assets under "normal" operations, but it does when it engages in other operations such as purchasing of non-USG securities and paying interest on reserves, doesn't it?

BTW, great point re the swap lines. Add in forex measures taken by govts of exporting-oriented economies (who despite their bluster still want to sell stuff to us). USD would be considerably stronger if not for those interventions, I think. They might explain some of the bid for gold too.

Tom Hickey said...

Good insight on thinking of gold as money and what they implies, art. I think you are right that it is good way of catching on to MMT.

Fits into the MMT point that convertibility and fixed rates hamper domestic fiscal policy wrt adjusting fiscal balance for changes in sectoral balances. The cb cannot create gold, and the focus has to be on BoP and the fx rate instead of domestic policy. This is the basis of the MMT argument for the superiority of a non-convertible floating rate.

As long as gold is thought of as "the world's money," then mercantilism rules, threatening wars, and governments are put in fiscal straightjackets that lead to high unemployment and depressions.

Mario said...

great points art. I agree with you and probably that kind of a logic thread would appeal to more people b/c it isn't "throwing gold out the window" immediately, but rather more accurately exlaining it.

"They might explain some of the bid for gold too."

how is that? I am not seeing the connection.

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Jeremy said...

I've managed to take away some interesting points from the article and comments. And a bit of a headache too haha.

Just chiming in with the debasement of the currency issue.. I'll just let these charts that I've come up with explain themselves.

http://grab.by/bo6D