Tuesday, May 29, 2012

JKH — Treasury and the Central Bank – A Contingent Institutional Approach

Fiscal and monetary systems do not exist without specific institutional design. In this regard, there is a difference between the facts of actual institutional design, and conceptual distillations that infer hypothetical design. Any overall view of actual treasury and central banking operations should be portrayed accurately in this respect. For example, there is a difference between the consolidated view of separate Treasury and central bank institutions as they actually operate, versus the view of an implied but unstated counterfactual in the sense of a unified institution. The actual operation of separate institutions is not at all the same as that implied by a unified counterfactual institution.
Read it at Modern Monetary Realism
Treasury and the Central Bank – A Contingent Institutional Approach
by JKH

Note: JKH cites Marc Lavoie's The monetary and fiscal nexus of neo-chartalism: A friendly critical look (2011), which brings up a criticism of MMT's consolidation of the Treasury and central bank functions (begins at p. 10). This is the point that JKH is attempting to clarify through an analysis of actual operations.

174 comments:

Matt Franko said...

I dont think anyone in MMT ever referred to them as a "unified institution"....

I would look at it as they are both entities within the same government sector.

paul said...

9,100 words give or take

A semantic masterpiece.

Tom Hickey said...

@ Matt

I believe that MMT says that the Treasury and Fed are "functionally consolidated" rather than institutionally consolidated.

Ryan Harris said...
This comment has been removed by the author.
JK said...

I think JKH's detailed analysis is very helpful in understanding operational details/mechanisms.

But a question in my mind remains: for all intents and purposes, does it make a difference? That is, is it still accurate/useful to consider the Treasury and Central Bank as functionally consolidated?

If for all intents and purposes, it really doesn't matter that the Treasury is operationally a currency user, then I think MMT needs to explain that position.

There should be a post tomorrow on New Economic Perspectives that discusses many of the issues in JKH's piece.

FDO15 said...

It looks like this is another post by JKH that is going right over the heads of MMTers. I'll give you a clue on JKH's most important part. It has to do with reserves and settlement and how MMT totally confuses these points to *prove* their misguided understanding and totally confused consolidated view of the Fed and Treasury and the idea that taxes drive money, etc.

I doubt any of you will understand these points or even consider how wrong MMT is about them so carry on with your typical insult laced comments and shrugging off of things that UMKC economists can't even begin to understand. There is, after all, a reason why no MMT economist is at a top 25 b-school. It's not because they're all undercover geniuses. It's because they make pitiful mistakes and then refuse to correct them.

Anyone diving into JKH's work here can easily see a dozen or so different mistakes in the MMT framework.

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

"…If for all intents and purposes, it really doesn't matter that the Treasury is operationally a currency user…"

Bingo.

"…then I think MMT needs to explain that position."

Nothing to explain, really.

From an MMT perspective, the only thing that matters is that the non-government can't create it's own dollar assets in the net and that there are no constraints on money creation by the government other than those we impose on ourselves. We aren't constrained by borrowing, since borrowing must come after creation.

Do we care if the Treasury isn't technically the currency issuer (not saying it is or it isn't)?

From the non-government (closed system) perspective there are (3) possibilities:

1. Net dollars can be added to the system (spending).

2. Net dollars can be removed from the system (taxation).

3. The quantity of dollars in the system remains unchanged.

Does the complexity of the operation on the other side of the system boundary matter to the system, which can only see changes in the quantity of dollars (NFA's)?

What matters is whether or not dollars can or cannot be spent into the system.

The economy can only react to changes occurring within the system.

My $0.02.

FDO15 said...

Paul said (before deletion):

"borrowing must come after creation."

You have failed the reading comprehension portion of this exercise. If you read JKH's post and still think the government spends before borrowing then you are misunderstanding the very most basic point he is making.

I'll give you another clue here. Banks existed before governments. Even in the USA. The monetary system did not evolve from some centralized government spending money into existence even though MMT wants us all to believe money is always spent first and taxed second.

Your central planning based government theory is wrong.

AndyCFC said...

@ JK
"But a question in my mind remains: for all intents and purposes, does it make a difference? That is, is it still accurate/useful to consider the Treasury and Central Bank as functionally consolidated?

Best ive heard it put was by Neil W, who says If you own a bank then you dont go and borrow from another as the interest payments would come back to you as dividends. So no I dont think it matters. But speaking for me I really enjoyed going through JKHs post, but really its for geeks.


And is it just me or that proving you arnt a robot is getting harder? I spend more time on that than my posts.

paul said...

Paul said (before deletion):

"borrowing must come after creation."

I said it after deletion too. :-)

Tom Hickey said...

@ FDO15

Troll much?

FDO15 said...

@ Paul,

Oh good. So you were wrong twice in one post.

paul said...

"is it just me or that proving you arnt a robot is getting harder?"

Have you clicked the little circular arrow to generate a new one that may be easier to read?

fyi - it's not case-sensitive either.

paul said...

@FDO15

"…So you were wrong twice in one post"

If I wanted to borrow your lawnmower and you didn't have one, would you be able to lend one to me?

FDO15 said...

@ Tom Hickey,

MMTers are here downplaying a very good and important piece who someone very intelligent put a lot of time and effort into. As far as I can tell, not one of you understands the significance of it.

I'll leave you all to yourselves where you can pat each other on the back and convince yourselves that your political agenda is still intact.

FDO15 said...

@ paul,

Private banks could create money and do create money without the government spending it into existence. This is how the government evolved in the first place by borrowing money from private bankers. Not that hard to understand really. Your lawnmowers existed before your precious government existed. All the government did was come in and change the rules of the game that the banks play by.

You still aren't understanding how the spend first and tax second idea is wrong, are you? Maybe try reading JKH's 9100 word masterpiece rather than shrugging it off. You might learn a thing or two.

Jonf said...

Banks came first? Are they still first? Where do dollars come from?

Tom Hickey said...

I am not aware that the MMT position is that the Treasury is the currency issuer. The position as I understand it is that government is the monopoly issuer of the currency, as long as the cb is not private. Then the Treasury and cb are agencies of government that function in a coordinated way to issue the currency under the specific rules of the county, which currently differ among countries.

I think that this is a pretty fair summation for non-economists. Generally speaking, economists either explicitly state or assume it is understood that explanations for non-economists are necessarily incomplete and abbreviated. Of course, the actual operations have to be technically set forth, but that's usually done in the professional literature. The question is not whether the simplification is complete but whether it is overly simple so as to confuse or be mistaken about essentials, or so overly complex as to be inaccessible to non-professionals.

It's beyond my job description to comments on how satisfactory MMT summary statements may be. However, from perusing the literature, I find fundamental disagreements not only between schools of thought but within schools. From my perspective as a philosopher, what we call "realty" is socially constructed and different views reflect different consensual realities. The putative facts are non-neutra among different consensual realities. So, fundamental differences are never resolved in that the putative facts are in dispute.

paul said...

@FDO15

Credit issued through private banks also creates a dollar liability for each dollar asset. This does not add one cent in net assets to USA's balance sheet.

Further, the cash required to satisfy a loan exceeds the original amount of the loan. Any idea where that money might come from?

BTW, I'm not criticizing anything JKH wrote and I haven't read anything in these comments that does.

I will say though that there are very few processes in the known universe that take 9,100 words to explain.

E=mc2 ?.

paul said...

"…You still aren't understanding how the spend first and tax second idea is wrong, are you? Maybe try reading JKH's 9100 word masterpiece rather than shrugging it off. You might learn a thing or two."

I read it.

I do understand that in the beginning we had no money (or in relative terms no money) and now the USA/world balance sheet has About $16 Trillion on it.

There is no chain of logic that can explain where that money was borrowed from no matter how many words are used.

FDO15 said...

@ Paul,

"Credit issued through private banks also creates a dollar liability for each dollar asset. This does not add one cent in net assets to USA's balance sheet."

So what? You're changing the point. The fact is, banks can create money from nothing and give it to the public for whatever they want. No one NEEDS the government to "spend first". That's a MMT myth that is total BS. The conversation about NFA's is a totally different subject that has nothing to do with whether the government spends or taxes first.

"Further, the cash required to satisfy a loan exceeds the original amount of the loan. Any idea where that money might come from?"

I can and often does come from a bank creating a deposit through a new loan. Where do you think most of the money in circulation comes from? NOT THE GOVERNMENT!!

Tom Hickey said...

To add to the above, there is a debate over monetary economics in Post Keynesians between Horizontalists and Structuralists, over matters such as this. See Randy Wray's paper, Endogenous Money: Structuralist and Horizontalist (2007)

Leverage said...

"Banks existed before governments."

Mmmm, not really, no. Treasury departments and taxes are probably older than 7.000 years.

Now, if you are talking about modern system of private central banks, modern banks invented in Italy etc. Yeah it transitioned from a system a commodity-backed money in the late middle ages (earlier middle ages though governments just coined money, see tally sticks).

Also, I don't think you really understand what is behind the notion of "taxes drive money" (coercion). Had you studied free-banking during XIX century (real private driven credit systems, not the travesty bankers now a day thunk is private banking) and the incessant hyperinflation crisis of bank money you would understand why taxes drive the state money (dollars, pounds, even euros).

You have too much to learn beyond semantic play games.

Greg said...

FD used to be one of the commenters at Prag Cap that Cullen had to ban because he was so toxic. Now that Cullen has made a break of sorts from MMT, FD has become a sycophant and runs around to the MMT sites and then reports back to the MMR site "Look what Randy is saying today about you guys!!!"

He's a pathetic little puke and its best to just ignore him.

Note to Cullen or Mike; I am not saying that you put him up to this kind of crap, I think you guys are way above that stuff. I just find it interesting that FD has become a regular MMRer when he was 100% anti MMT when Cullen hadnt "broken away". MMR is self admittedly over 80% in agreement with MMT and now FD is all over MMR.

TOOL!

Tom Hickey said...

The MMT position is that net financial assets is (injected) into the economy by deficit spending, which is done by Treasury. Those deposit credits clear through reserves that are only issued by the cb, in the US the Fed.

Banks can create deposits denominated in the unit of account but they cannot create (issue) currency, which only originates with the cb as reserves. Banks exchange reserves to obtain cash, and the interbank settlement system operates solely in reserves. Bank-created deposits net to zero, so there no net money creation in non-government due to credit extension.

Anonymous said...

He probably works in banking or finance.

Imagine the disaster for bankers if people knew that we don't need to feed parasites any more... He could't buy McMansion and receive big bonus by being a rentier.

Is better to deceive people.

Tom Hickey said...

"You have failed the reading comprehension portion of this exercise. If you read JKH's post and still think the government spends before borrowing then you are misunderstanding the very most basic point he is making."

This was hashed out in great deal in the famous Marshall's latest thread at Warren Mosler's some time ago, as well as in numerous other places. Nothing new to see here.

Leverage said...

Tom, if banks could create there would be no need for the ELA and Bankia wouldn't have any problem.

If the banks could enforce their own money they would not need to use the name of 'euros' or 'dollars' to deceive people eithe, they could name it 'JP Notes'for example. And what's the problem in a bank run? No need for the bail out to bail them out, plug the hole of collapsing credit. They could just print new JP Notes!

But, oh wait... that's exactly what happened in XIX century, but bankers screwed so bad that bank money had to be backed by the state gold reserves and charters, which wer backed at the same time... wait for it... by federal government debt!!!!

Modern bankers know the lesson so they have to go and cry to the mighty Uncle Sam to go save them of their own uncontrollable gambling.

The rest? Just semantics and deception, a lot of deception.

paul said...

@Leverage

"…if banks could create there would be no need for the ELA and Bankia wouldn't have any problem."…

"…If the banks could enforce their own money they would not need to use the name of 'euros' or 'dollars' to deceive people eithe[r]"…

Very good points.

Leverage said...

BTW my posts are comments on FDO comments. Have nothing particular against JKH post, but I don't think it changes the fundamental issue: that you must 'create money' before 'spending it' or 'taxing it', so there is an currency issuer, and a currency user.

Now, in modern democracies there has been an evolution over time of how this works but the different institutions are under the umbrella of "the State". Only central bank institutions are supposedly independent (not in practice as we have seen repeatedly during the last years with constant market manipulation by political order) of congress and treasury.

Well, all fine, but the State still issues money and other use it. Like this or not, and it has been like this since ancient times (even if there was coexistence with private money system at some times).

Greg said...

I agree with your sentiments Leverage

To me its also like the discussions about the origins of money. They are interesting and I do enjoy rubbing gold bugs noses in it a little when Grabers work comes out but I dont necessarily think its a settled point. But its mostly moot whether or not private gold backed money was first or state tax backed money..... TODAY its state tax backed and we need to know how it works. Work to change it if you wish but understand it first.

Its not unlike the constitutional originalists, I dont really give a shit what they meant because Im not wed to their ideas today and frankly my grandkids should be able to do whatever they please when they are in charge. Its not Thomas Jeffersons world to dictate for over a thousand years..... and I think he would agree with me...... I digress

paul said...

"…frankly my grandkids should be able to do whatever they please when they are in charge…"

My sentiments exactly.

I do feel like it's my job to help make sure that other kids grandparents don't make off with all the assets before mine get a chance to take over the reins.

Tom Hickey said...

"MMTers are here downplaying a very good and important piece who someone very intelligent put a lot of time and effort into. As far as I can tell, not one of you understands the significance of it."

I have never downplayed JKH's work, and I post links to it because I think it is worthwhile considering. JKH knows his operations and advancing operational understanding is always a plus.

What I am saying that showing that under present institutional arrangements the Treasury must get reserves by some route from the cb before (temporally) it can inject NFA into non-govt by crediting bank accounts since reserves are required for settlement is not the issue in that the MMT economists also say that.

The issue is that bonds cannot be purchased by anyone but the cb since they have to be paid for by reserves and only the cb can issue reserves. Banks cannot issue reserves and don't when they create deposits by granting loans. They have to get those reserves from somewhere else then their ability to issue reserves themselves, and that somewhere else must end with the cb since only the cb can issue reserves.

Thus it is true that for the private sector to purchase bonds in the first place, it has to obtain reserves, since bond auctions finally clear in reserves when they pass into non-government through the agency of the primary dealers.

Banks could conceivably borrow the reserves from the Fed to purchase tsys as one option but this is generally disallowed since the collateral for borrowing from the Fed is tsys. The other option is that the reserves come from the reserves injected into non-government by deficit spending. In this case the reserves are logically prior to the purchasing of tsys.

This is what Paul is taling about.

But the MMT picture is somewhat from that, too. What MMT economists are saying is that at the aggregate level it makes more sense to say that spending (logically) precedes tsys issuance (so-called borrowing) in that tsy issuance is operationally a reserve drain that does an asset swap between excess reserves created by deficit spending and tsys issued in offset, because it doesn't make sense in a fiat system to say that govt must finance itself separately from issuance. Rather, what is happening operationally is a reserves drain so that the cb can hit its target rate without either setting the rate to zero or paying IOR.

It is instructive to know how the Treasury and central bank operate in specific situations like the US, but it doesn't really relate to the MMT assertion that spending (logically) precedes issuance of tsys.

Again, this has already been discussed ad nauseam.

JK said...

Tom, you said: "Banks cannot issue reserves and don't when they create deposits by granting loans."

The second half of that sentence has been a point of confusion for me:

If in the aggregate banks are making enough loans that the Fed is "forced" (in order to meet it's target rate) to buy securities to maintain enough reserves in the banking system…

Is that not banks "creating" reserves when "they create deposits by granting loans." ?

paul said...

"Is that not banks "creating" reserves when "they create deposits by granting loans.?"

I suspect it is Fed policy, maybe unwritten, to not allow the banking system to "lock up" due to inadequate liquidity.

The Fed lets out slack to meet demand. Banks aren't creating reserves. They create the need for more liquidity by making loans.

Still, why does this distinction matter.

How would we model this behavior in a mathematical model?

Tom Hickey said...

If in the aggregate banks are making enough loans that the Fed is "forced" (in order to meet it's target rate) to buy securities to maintain enough reserves in the banking system…

Is that not banks "creating" reserves when "they create deposits by granting loans." ?

The banks would be forcing the Fed to create reserves due to the LLR policy the cb has in place, rather than creating reserves themselves, which they have no power or authority to do.

When Warren and other MMT economists say that "banks create reserves," this is what they mean (as you correctly say). However, I would not say it that way, since it can result in confusion if one doesn't really understand the process. I would just say that banks can force the cb to create reserves for settlement if the cb has an LLR policy.

paul said...

BTW, the MMT community is being disparaged over at MMR (You're petty) because of my first comment on this post.

If anything, I'm the one being petty and I don't speak for MMT anyway, so feel free to point that out over there if it comes up. I apologize if I have embarrassed anyone here at MNE. That said…

"9100 words more or less" True

War and piece was often described as a long book. Was that a criticism?

A semantic masterpiece? Possibly True.

I meant that as a heads-up to Matt F., who pointed out the there is a difference between semantic and logical understandings.

It is being hailed by certain folks as a ground-breaking piece. Nothing like taking something too seriously before it's been digested by the community.

They are quite thin-skinned over there, it seems.

JK said...

@paul

Outside of FDO15's comments, there really hasn't been much disparaging. Even Cullen called him out for it.

I think I'm the only one that used the word petty i the MMR comments section, and I used it to describe FDO15's comments.. not yours.

Tom Hickey said...

"BTW, the MMT community is being disparaged over at MMR (You're petty) because of my first comment on this post."

This kerfuffle is a tempest in a teapot, engaged in by people who are taking too seriously, and that goes for both sides. A professional debate should be conducted on the merits alone.

JK said...

I agree with Tom Hickey on this. He's a great example of how these issues should be discussed. Have you never see him disparage someone else in any of these disagreements?

As a side, I think the reason people disparage others and get so heated about the issues is because they've internalized beliefs. The ideas have become part of their identity. This is most glaring when it comes to religion and politics. But it can be seen in many forms.

For example, why do fans of sports teams get so angry with each other? Why do Pittsburgh Steelers and Philadelphia Eagles fans have so much animosity?

Again, people internalize their beliefs. Their beliefs become part of their identity. Consequently, once this happens, an attack on someones beleifs becomes an attack on them as a person.. similar to an actual physical attack. And just like in a physical attack, people then get defensive and hit back.

etc.

l

paul said...

@JK and Tom,

It's not my intention to start a flame war and I don't think it's any big deal myself.

I just wanted to make clear, since there is a pretty constant anti-MMT community sentiment over there for whatever reason, that I didn't want anyone at MNE to have to defend guilt-by-association comments because of something I wrote.

One reason I like this place is no one gets threatened with banishment when they disagree with the prevalent point-of-view.

This is probably way more than needs to be said on that subject so I will drop it.

STF said...

Seems to me this is apples vs. oranges. You can't compare the most specific possible account of Tsy/CB vs. the most general MMT narrative. Obviously the latter is intended to simplify. Why not compare the former to my institutionalist-based work instead? Then we'll see if someone thinks there have been oversimplifications. Different publications and posts have different intents and thus different levels of detail, necessarily. I have yet to see anyone seriously acknowledge this fact when writing a critique of us.

Similarly, one should not confuse a THEORY of how a currency issuer operates with a detailed description of how the US Tsy/CB operates. The point of the theory is obviously to obtain/provide (more general) insight into present and future, not provide detailed description. But it happens over and over (Fiebiger, anyone?). And I've yet to see any detailed description that offers any more insight into our current predicament than the MMT general theory, including the one linked here, as good as it is in terms of the details (which is very, as would be expected given the source).

Try for a moment to understand what all is entailed in developing a school of thought, a literature, a theory, a history of thought, a description of history, an attempt at explaining real-world details, policy proposals, metaphors and narratives written for those on the left or those on the right, critiques of other schools of thought, etc., etc. Critics like to pick and choose among those as it fits their own purposes at any point in time. That is their right, and it suits their purposes precisely because they are not trying to develop all of the above as we have done and continue to do. Best of luck to them.

Trixie said...

Full Disclosure: I read up until "strategic currency issuer" as opposed to "currency issuer". Or something like that. And I've already forgotten if air quotes are required.

ANYWAY as long as we are on the subject, here are my thoughts on how I think it works and some questions:

Prior to actually spending the Treasury anticipates the amount of bonds it will need to issue (as determined by the diff between revenues less expenditures)

The Treasury then sells these bonds to the banks. The banks purchase these bonds the same way they create loans. Out of thin air and a lot of hand-waving. No reserves or deposits are used. DR Bonds/CR Treas TT&L Acct

Deposits in the TT&L acct (created out of thin air) are then transferred to the Treas acct at the FED. This transaction is settled in reserves.

The Treas then deficit spends. This deficit spending nets to zero in the non-gov sector.

The NFAs are the bonds the non-gov sector holds.

Questions/Clarifications:

1. Is this basically correct operationally? (Sans the semantics, otherwise I will create anagrams out of anything you say..or a haiku).

2. The NFA being the bond. Why do I care that the system is basically rigged?

3. The actual deficit spending that nets to zero? I see that as additional spending power in the economy because I don't view banks acting in the economy the same way as businesses and households. I see the reserves (necessarily created from deficit spending) simply contributing to the daily reserve shuffle in the banking sector.

JK said...

Scott,

Thanks for chiming in. Can you link us to some of your institutionalist-based work for comparison?

Tom Hickey said...

"Critics like to pick and choose among those as it fits their own purposes at any point in time. That is their right, and it suits their purposes precisely because they are not trying to develop all of the above as we have done and continue to do. Best of luck to them."

I have made this point many times, both publicly and privately. And what you didn't spell out, Scott, is that when one attempts to simply complex issues for non-experts the rubber hits the road. For example, many people have no idea of what a genius Paul Krugman is wrt this on his blog. It is really a talent that separates the really good teachers and writers from others. In my view the MMT economists are very good at this. Warren is an absolute genius in terms of being precise and concise, but often what he is saying goes over a lot people's heads.

Tom Hickey said...

Trixie "Prior to actually spending the Treasury anticipates the amount of bonds it will need to issue (as determined by the diff between revenues less expenditures)"

Settlement is in reserves. When someone in the private sector purchases a tsy, a deposit account is drawn down as the bank transfers reserves to settle the transaction. The purchaser of the tsys then holds tsys in that amount and reserves are drained from the system. The cb then credits the tsy account with that amount of reserves and then the Treasury spends by crediting deposit accounts, which settle in reserves. So there are then X amount of tys in non-govt and the same amount of reserves as there were before. That means that are there twice the net financial assets held by non-govt afterwards than there were before the deficit spending.

This is all at the aggregate level. What happens operationally on the way is irrelevant to that as far as the outcome is concerned. Depending on specific rules in different countries the process could transpire differently, but the outcomes are the same in aggregate.

Matt Franko said...

This is an interesting comment:

"Great post JKH.

I have to admit now, that I more confused than before I read it. "

?????????

Matt Franko said...

Trixie,

Not quite there imo... let me try to find a reference...

Resp,

Trixie said...

Ok Tom. Thanks. I need to chew on:

That means that are there twice the net financial assets held by non-govt afterwards than there were before the deficit spending.

The bond is technically a NFA. That I get. But the deficit spending is an asset to me and a liability of the bank. Which nets to zero. Yes?

And I am moderately confident that is conceptually where I am getting tripped up. Because that deposit will always clear based on our current reserve system.

@Matt, please do pass along any links...

Matt Franko said...

Trixie,

"This all leads me to the often noted MMT point that “spending comes before tax revenues are received
or bond sales.” If one expands this a bit to include loans from the Fed, then this statement is absolutely
correct in terms of the operational realities of the monetary system. That is, according to both the
tactical and accounting logics, taxes credited to the Treasury’s account and the settlement of Treasury
bond auctions can only occur via bank reserve accounts, while the original source of banks’ balances in
their reserve accounts can only be previous government deficits (which are net credits reserve accounts)
or loans from the Fed (repos, loans, purchases of private securities, or overdrafts—note that an outright
purchase of a Treasury security by the Fed to add reserve balances requires a previous government
deficit). Therefore, it very much is the operational reality that for taxes to be paid or bonds to be
settled, there has to have been previous government spending or loans from the Fed to the nongovernment sector, and this is true whether or not the Fed is legally prohibited from providing
overdrafts. "

http://www.moslereconomics.com/wp-content/pdfs/MMT-Scott-Fullwiler.pdf

rsp

Tom Hickey said...

@ Trixie

Deficit spending injects NFA into nongovt because the reserves to settle the Treasury's crediting of deposit accounts through disbursements are a liability of the Fed, i.e., government.

geerussell said...

For me it was a weighty piece that provides both learning opportunities and plenty of food for thought.

The one area I thought the wheels came off the cart a bit was the currency user/issuer stuff, torturing a clear concept into a muddled mess.

Saying the United States is a currency issuer is clear without specifying any internal institutional arrangements. For the purpose of the concept they don't matter, the sovereign is a black box. Even going into further specifics at that level such as floating rate and non-convertible are still abstracted from what's inside the institutional black boxx.

I think MMR is prone to a kind of institutional myopia that sometimes trips over itself losing sight of very simple abstract concepts in the weeds of how those concepts are implemented.

Tom Hickey said...

@ geerussell

Right. The fact is that the federal government is the currency issuer per the US Constitution Article 1, sec 8. Congress decides how this process is to actually take place. The US has used different processes historically to accomplish currency issuance. Congress presumably could also delegate currency issuance to the private sector if it so chose.

Treasury is indeed the "user" in that as it disburses funds by crediting deposit accounts and has to get the reserves to cover from the issuer of reserves, which is the cb, in the US the Fed. But to say that Treasury is a currency user and the cb the currency issuer seems to be to be more confusing than helpful.

It is quite clear that the federal government operating through its agencies issues currency into non-government, which is made up of users of the currency. In this relationship, state and local governments are currency users.

Treasury is clearly not a currency user in this sense. Treasury is simply the agency that disburses funds created by government iaw the directives of government through the appropriation process and other legislation. Treasury cannot "spend." That power is vested in Congress in the Constitution.

If the central bank were independent of government, then government would be borrowing to fund itself. But the cb in the US at any rate is presently an agency of govt that is independent of political influence but it is not independent of government, i.e., private. Government does not borrow from from the Fed or from banks. Government through Treasury issues tsys and through the Fed issues reserves. This is the combined way that Congress in its infinite wisdom (NOT) has decided the government is to issue currency using tsys, reserves, and cash.

Congress has also permitted banks to denominate deposits corresponding to loans in the govt unit of account and to have access to reserves through the settlement system. But Congress has not authorized banks to create currency, i.e, to increase net financial assets. Bank money created through credit extension nets to zero and is extinguished when the loan is paid off with no change in net financial assets in the system.

STF said...

Exactly, Tom. Whoever equated the Tsy with the "govt"? I suppose someone can pull a quote from somewhere, but even so, that's a far too fundamentalist interpretation of MMT (lots of that going around, though).

The "govt" or "sovereign currency issuer" of MMT is the authority over both the Tsy and Fed. In that context, I have no problem with callin the former a currency user and the latter a currency issuer, so long as one doesn't suggest the latter has some necessary authority over the former as a result. Both take their marching orders from the "govt." And in the case of coin seigniorage, for example, clearly the Tsy can become a currency issuer, too, and according to Beowulf is the one with the greater authority in that instance.

Trixie said...

Tom, I couldn't find the post I read months ago re: Tres deficit spending (by Kelton) over at NEP -- presumably it was eaten when they moved to a different blogging platform. But I was able to locate it elsewhere on the net:

http://wallstreetpit.com/50874-yes-deficit-spending-adds-to-private-sector-assets-even-with-bond-sales

And in its conclusion I see one NFA created (the bond). The crediting of an account from deficit spending is offset by the bank's liability.

My bank account has an additional $10 in it (my asset), which is offset by the fact that BoA owes me an additional $10 (their liability). This nets to zero. But, wait! There is still a new financial asset out there . . . the government bond!

Thoughts?

@Matt: Yep, yep, I understand that spending must come first and that the self-imposed operational constraints between Fed/Treas make that point less obvious. But I'm stuck on the crediting of the account by the Treas that I see as a "technical" netting to zero but acting as a -- wait for it -- quasi-NFA. Ta Da, because **I** get to make up words too, you know. (See link above)

JK said...

A point of confusion for me"

Can the central bank issue currency WITHOUT/INDEPENDENT OF the Treasury? If it can, then I can see how we could call the CB the currency issuer in the relationship. Whereas if the CB needs Treasury action in order to issue currency, then here we are again back in semantics and at the original MMT proposition: together they are the currency issuer (along with any other necessary federal government functions), but neither one in of and itself is a currency issuer.

Any thoughts?

JK said...

Just now saw Scott's most recent comment. So technically the Treasury can issue currency (coins) without/independent of the Fed.

So the Treasury CAN issue currency.

Can the CB issue currency without/independent of the Treasury?

STF said...

JK,

this is why being explicit about hierarchy is so important. The "currency issuer" of MMT is the rule maker, the highest authority that creates the laws both the Tsy and Fed follow. The Fed as currency issuer in the discussion here is not the rule maker, and the Tsy as currency user is not of a lower authority than the Fed as currency issuer. This discussion is about apples and oranges since the post we are all discussing does not deal explicitly with hierarchy. Indeed, a simple change of rules can make the Tsy currency issuer within that context--such as coin seigniorage, or a law requring the Fed to provide overdrafts (as happens in some countries). The currency issuer vs. user being discussed in that post is not the same currency issuer vs. user that MMT describes.

For a more explicit treatment of hierarchy, see here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1874795

Tom Hickey said...

"My bank account has an additional $10 in it (my asset), which is offset by the fact that BoA owes me an additional $10 (their liability)."

And BoA an asset corresponding to the $10 that the Treasury had them deposit in my account, and since the Treasury directed its bank, the Fed, to credit BoA with $10 in reserves for them to credit my account without loaning me money. That asset credited to their reserve account at the Fed is a liability of the Fed, which is why it is a net financial asset of non-govt — no corresponding liability in no-govt to net to zero.

Tom Hickey said...

STF "I suppose someone can pull a quote from somewhere, but even so, that's a far too fundamentalist interpretation of MMT (lots of that going around, though)."

Right. Taking quotes out of context can misrepresent the intention by ignoring the context.

STF said...

JK,

It's a good question, but it comes down to how one defines currency issuer. In the MMT context, that question does not make sense--neither the Tsy nor the Fed are currency issuers or currency users. They are departments of the govt, and that govt by virtue of the monetary system it operates within is either a currency issuer or a currency user. This is not to say it isn't important to understand the details of Tsy and Fed, etc.--that's my bread and butter, so obviously I think it is--but that's all tangential to the MMT argument about what a currency issuer is.

Tom Hickey said...

JK, the Treasury is empowered to issue tsys and the Fed is empowered to issue reserves. The Treasury is empowered to mint coin, and the Fed empowered to print FR notes. The Treasury is empowered to conduct fiscal operations as an agency of government iaw directives it receives from the executive branch pursuant to expenditure authorized by law. The Fed is empowered to conduct monetary operations with certain limits that prevent the Fed from crediting private accounts in what would amount to fiscal operations. All of this is done iaw the laws emanating from the legislative branch as executed by the executive branch. Treasury and the Fed are agencies that implement policy iaw law and regs, although the Fed is also empowered to conduct monetary policy independently of political influence.

To some it up, the federal government is the actor through the executive branch, and the Treasury and Fed are simply agents for the actor as principal and beneficiary. The Treasury and Fed are not actors (principals) themselves, excepting the Fed's being empowered to conduct monetary policy independently of political influence.

JK said...

Scott and Tom,

thanks for the responses.

I thought JKH did a great job of explaning operational mechanisms in a way that us novices can understand. But ultimately, it doesn't seem that he has presented a fundamental challenge to what MMT is saying.

Trixie said...

And BoA an asset corresponding to the $10 that the Treasury had them deposit in my account, and since the Treasury directed its bank, the Fed, to credit BoA with $10 in reserves for them to credit my account without loaning me money. That asset credited to their reserve account at the Fed is a liability of the Fed, which is why it is a net financial asset of non-govt — no corresponding liability in no-govt to net to zero.

Just wait a minute. That's what **I** said. Or tried to.

Missing Link: Found!

But I am totally taking credit for introducing 'quasi-NFA'. Life isn't fair like that.

Dan Kervick said...

"Can the central bank issue currency WITHOUT/INDEPENDENT OF the Treasury? If it can, then I can see how we could call the CB the currency issuer in the relationship."

JK, one possibly relevant fact is that the Fed now pays interest on reserves. Unlike open market operations, this is money that the Fed simply credits to the reserve accounts, without the intermediation of a Treasury operation.

Of course, there have to be reserves in those accounts in the first place, so maybe that brings us back to more chicken/egg questions.

Tom Hickey said...

@ Trixie

you: $10 asset (from Treasury) — BoA: $10 liability

BoA $10 asset (rb from Treasury account) — Fed: $10 liability (rb are Fed liability)

PD $10 asset (tsys purchase) — Treasury $10 liability (tys issuance)

Treasury $10 asset (reserve credit from Fed) — Fed Fed: $10 liability (this rb credit to Treasury gets credited to BoA above for its credit to your deposit account)

So at the end of the day there is $10 in tsys held by the private sector and $10 in reserves corresponding to a bank deposit. That as total of $20 in NFA, with $10 of that switched to tsys and a new deposit of $10 created with a reserve add.

Trixie said...

Understood Tom. I had an a-ha moment. Thank you.

But that doesn't mean I'm not going to start my own macro theory now.

More to come...

(Twirls hair)

Tom Hickey said...

Not that hard. What happens is that the reserve amount just gets switched from the purchaser of the tsys's account to the recipient of the Treasury's disbursement, while the purchaser of the tsys has the tys in that amount, too. Bank reserves stay the same and tsys increase by the amount the disbursement, so it could be said that the currency is issued through the issuance of the tsys.

Those who say that the Fed is the currency issuer overlook the fact that the Treasury issues govt liabilities, too.

What this does is enable govt both to issue currency by injecting NFA through disbursements and also to create vehicles for saving NFA by issuing tsys, in a tandem operation involving issuance by both the Treasury and the cb.

Trixie said...

"Not that hard."

Oh, shup.

Next up: MMQ

Trixie said...

Which BTW, MMQ will stand for Modern Monetary Qualory.

You're just jealous.

Anonymous said...

Is not the treasury the one who mints coins and bills by constitutional rights?

I rest my case. Mint the trillion dollar coin and be done with this non sense.

Matt Franko said...

They are generally having trouble with being able to see where the relevant system boundary is imo.

Seems like their focus keeps returning to a boundary between the CB and the Treasury; rather than the boundary between the govt sector and non-govt sector.

rsp

paul said...

I have a few observations on the NFA/money creation operation looking at it from a black-box perspective over history.

A kind of reverse-engineering.

When the government sells Treasuries to "fund" the deficit, dollar NFA's are swapped for Treasury NFA's.

Simultaneously, new dollar NFA's are spent into the non-government.

The result is that Treasury NFA's have been increased by the deficit amount and dollar NFA's in the non-government remain unchanged. Rinse and repeat for each successive budget.

No matter how many times this operation is done, the quantity of dollar NFA's remains unchanged.

The consequence is that if this were the only way to generate dollar NFA's the USA would still have only the dollar NFA's it held at the inception of the Republic. Zero? $50 Million?. $50 Million is still very nearly zero in comparison to the National Debt™ today.

There MUST be a loophole.

That's the thing about semantic constraints on operations. There will always be loopholes.

That's the thing I love about math. No loopholes.

During WWII, the National Debt™ rose from about $50 Billion to $260 Billion in three years. That's more than a five-times increase in NFA's.

Clearly, that many bonds could not have been sold to the public because the public didn't have that many dollars and normal "legal" operations don't allow direct creation of dollar NFA's without equal bond sales.

Thus, this operation was mathematically impossible under institutional constraints. But we did it anyway.

Fast-forward to the present.

Total NFA's in the non-government are about $16 Trillion now.

Of this total approximately $11 Trillion are held as Treasuries by the public and foreign entities.

What about the other $5Trillion? It must be dollar NFA's held by the non-government. It is probably only a coincidence that there are an addition $5 Trillion in bonds held by the Fed.

Constraints or not, when the government wants to do it it gets done.

316 words. :-)

JKH said...

Scott,

“This is not to say it isn't important to understand the details of Tsy and Fed, etc.--that's my bread and butter, so obviously I think it is--but that's all tangential to the MMT argument about what a currency issuer is.”

How do you reconcile this approach with that of some other MMTers (at least Mosler and Auerback) who refer to the ECB as a currency issuer? Your comment above seems to suggest that the ECB does not fit the mold of “what a currency issuer is”. Yet they use the term liberally in that context (and in a way that I agree with).

If you think those two different usages within MMT are consistent, then it must mean there are at least two different general definitions of currency issuer, depending on regime differences, according to MMT. Otherwise they are inconsistent.

But it’s also one reason why I’ve suggested a 2 tier operational/strategic definitional scale – to make the idea compatible across different regimes. My “strategic” qualification is entirely consistent with your preferred use of the term, I think. But my “operational” qualification is entirely consistent with the Mosler/Auerback usage for the ECB. And that’s the purpose of my 2 tier definitional system – to allow seamless use of the concept at the two different levels within regimes and also across different regimes where authority has a different skew between those two levels.

(BTW, I know you and I use the term “operational” differently, but leaving that aside.)

paul said...

A quote from a comment at another blog…

"…the idea that the Fed can be the buyer of bonds when “the rubber meets the road” is a moot point as that would only really happen in the case of a hyperinflation

…The current institutional framework shows that Warren’s comment is void of value since it would only occur in a situation in which a currency is already dying…"

Excuse me?

There are two examples in my comment above at 7:54 AM that destroys the premise of this argument.

y said...

Stephanie Kelton has written an interesting paper on this topic:

"Can Taxes and Bonds Finance Government Spending?" (1998)

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=115128


"Federal Reserves notes (and reserves) are booked as liabilities on the Fed's balance sheet and these liabilities are extinguished/discharged when they are offered in payment to the State. It must be recognised that when currency or reserves return to the State, the liabilities of the State are reduced and high-powered money is destroyed.
The destruction of these promises is no different from the private destruction of a promise once it has been fulfilled. In other words, when an individual takes out a loan, she issues a promise to a bank. Once she 'makes good' on that promise (i.e. repays the loan), she may 'destroy' that loan debt (liability) by eliminating it from her balance sheet.
Thus, while bank money (M1) is destroyed when demand deposits are used to pay taxes, the government's money, HPM, is destroyed as the funds are placed into the Treasury's account at the Fed. Viewed this way, it can be convincingly argued that the money collected from taxation and bond sales cannot possibly finance the government's spending. This is because in order to 'get its hands on' the proceeds from taxation and bond sales, the government must destroy the money it has collected. Clearly, government spending cannot be financed by money that is destroyed when received in payment to the State!
How, if not by using the money received in payment of taxes and bond sales, does the government finance its spending? Notice that the government writes checks on an account that does not comprise part of the money supply or HPM but that as it does, the funds become part of the money supply (M1 if deposited into checking accounts, M2 if savings accounts, etc.) and part of HPM. It is therefore apparent that while the payment of taxes destroys an equivalent amount of money (M1 immediately and HPM as the proceeds go into the Treasury's account at the Fed), spending from this account creates an equivalent amount of new money - both bank money and HPM. Modern governments, then, finance all of their spending through the direct creation of new (high-powered) money."

y said...

It's also interesting to note that in the US, Federal Reserve notes are "legal tender", which can be redeemed in "lawful money" issued by the Treasury.

"Lawful money" is coins, notes and bonds issued directly by the Treasury.

In essence, Federal Reserve notes gain value from being redeemable in Treasury money, and not vice versa.

So it could be said that rather than the Treasury having to issue bonds to get Federal Reserve notes, it is actually everyone else who has to hand over Fed notes to get Treasury bonds.

In order to get your hands on Fed notes so that you can then acquire Treasury bonds, you have to go out and work, which is precisely what the government wants.

If the government wants you to spend less Fed notes in the wider economy, it lowers the price of Treasury bonds. If it wants you to spend more, it raises the price of Treasury bonds.

Just a thought.

paul said...

y said...

"It's also interesting to note…
[snip]
…Just a thought."

Excellent observation

Anonymous said...

"y",

There is a reason why federal 'debt' was used as the highest quality collateral during free banking times, as has been said above.

Tom Hickey said...

Matt: "They are generally having trouble with being able to see where the relevant system boundary is imo.

Seems like their focus keeps returning to a boundary between the CB and the Treasury; rather than the boundary between the govt sector and non-govt sector."

While the vertical-horizontal is the most significant frm the macro point of view, which is why MMT focuses on clarifying, there is also a lot of debate over the boundary between the Treasury and cb, and MMT'ers claim that in the US the Treasury and Fed are "functionally consolidated." The meaning of that is being explored. While it is a detail, it is an important detail.

Tom Hickey said...

JKH, for what it's worth since I am no expert in this, the way I understand Mosler/Auerback's assertion that the ECB is the currency issuer of the EMU is that there is no EZ government and no fiscal authority, so that the institutional authority that is the source of the euro is the ECB at which the national cb's have accounts and whose lead (rule) they must follow.

Virtually everyone except the Eurocrats admits that this is a crazy monetary-financial model that is pretty much doomed to fail if left in its present state and the treaty rules are not changed.

Apparently the Eurocrats never intended that it would be the final step, but was only an initial stage in a process of fiscal and political union of a US of E, which would be the largest economy at present and capable of competing not only with the US but the entering giants, China and India.

If the ECB is not the currency issuer, who is. It cannot be the national cb or Treasuries, or the EZ would not be in the difficulty it is now. Nor can there be no currency issuer, since there are euros and they have come from somewhere. Seems that the ECB is the only possibility.

y said...

Regarding Marc Lavoie's paper:

From what I can remember, Lavoie repeatedly makes the mistake of assuming that the central bank is not part of the government (in the US and other such countries).

He keeps talking about the government and central bank as if they are two different things, with the CB as some sort of magically seperate entity.

Tom Hickey said...

@ y

This is key. Many people mistake the independence of the cb as a govt agency from political influence with independence from government as a separate (private) entity. Huge mistake unless the cb is actually private, which the Fed is not.

y said...

Are there any private central banks?

Matt Franko said...

y,

He is in Canada which I also believe JKH is in.

I think the BOE reports to the Queen and Canada reports to the Queen also so perhaps the Bank of Canada reports to the Queen in effect and the Canadian Treasury is subject to the Bank of Canada which is subject to the Queen...

So in Canada it seems you are under a different form of Sovereignty than in other countries such as the US (Queen).

Perhaps being subject to this other form of Sovereignty is effecting their ability to discern the differences in the US arrangements as we have a different basic arrangement in authority in the US...

Resp,

y said...

The Bank of Canada is "a Crown corporation belonging to the federal government".

The Bank of England is "wholly owned by the Treasury"

Matt Franko said...

y,

It doesn't look cut and dry:

http://en.wikipedia.org/wiki/Monarchy_of_Canada

"Per the Canadian constitution, the responsibilities of the sovereign and/or governor general include summoning and dismissing parliament, calling elections, and appointing governments. Further, Royal Assent and the royal sign-manual are required to enact laws,"

She has authority. This is different than in the US.

Resp,

Ramanan said...

Matt/y,

Too bad for you if he doesn't go for the overkill. Marc has used phrases such as constitutional monarch when describing central banks as far back in time as 1984.

Tom Hickey said...

Central banks used to be privately owned but modern central banks are government agencies. However, bankers were instrumental in formulating the the legislation and they made sure that the financial sector retained effective control of central banking, de facto "ownership" if not de jure. The global financial sector is now seeking to erect an international system that is above national control, but rather is under the control of the finance capital. "For the good of everyone," you know.

y said...

It's not "overkill" to say that a central bank is part of the government if that is actually the case. The Fed is part of the government, the BoE is part of the government, the BoC is part of the government. Aren't they?

I read Lavoie's paper a while back and as far as I can remember he refers to central banks and governments as separate entities.

y said...

"Marc has used phrases such as constitutional monarch when describing central banks as far back in time as 1984."

Could you explain this please? I'm not sure what you mean.

y said...

Matt, you're right the Queen does have powers, but she never exercises them. It's a constitutional system based on everyone being very polite and well behaved.

Matt Franko said...

Y,

"The relationship between the central bank and the commer-
cial banks is very similar to that between the vassals and their suzerain.
Kaldor has used an equivalent picture: "The Federal Reserve or the
Bank of England are in the position of a constitutional monarch
: with
very wide reserve powers on paper, the maintenance and continuance of
which are greatly dependent on the degree of restraint and moderation
shown in their exercise" [Kaldor 1970, p. 9]."

Page 780 here:

http://mulestable.net/file/ramanan-20120402T004730-vd5lb8d.pdf

Ramanan is on top of this....

Resp,

Matt Franko said...

Perhaps being subject to such a Sovereign is leading them to this analogy, ie "constitutional monarch".

That is not analogy I would make in 1 million years... but again I am not subject to such a Sovereignty here in the US.

This is perhaps why their focus keeps being shifted back to the Treasury/CB system boundary rather than one I would focus on which is the govt/non-govt system boundary...

It's like talking about the paint job on the steel bridge which just collapsed... I dont "get it"...

Resp,

paul said...

"It's like talking about the paint job on the steel bridge which just collapsed…"

:-)

Tom Hickey said...

The BoE was nationalized in 1946, IIRC.

AndyCFC said...

@ Tom
yep 1946

JK said...

Tom HIckey said: "If the ECB is not the currency issuer, who is. It cannot be the national cb or Treasuries, or the EZ would not be in the difficulty it is now. Nor can there be no currency issuer, since there are euros and they have come from somewhere. Seems that the ECB is the only possibility."

How exactly do new net financial assets (of Euros) come into existence?

Ramanan said...

"How exactly do new net financial assets (of Euros) come into existence?"

If a sector has a deficit others have a surplus.

The domestic private sectors of most Euro Area nations have a positive net financial asset position (except perhaps Spain) because of positive NAFAs in the past which arose due to the deficits of another sector such as the domestic government and/or the external sector (as in positive current BoP).

Tom Hickey said...

How exactly do new net financial assets (of Euros) come into existence?

I believe that NCB's sell govt bonds denominated in euros to get the euros to fund expenditure. So the euros originate in different countries. The NCB have an institutional arrangement with the ECB to issue euro under these conditions. They can't just issue euro as notes or reserves.

Greg said...

"The Bank of Canada is "a Crown corporation belonging to the federal government".

The Bank of England is "wholly owned by the Treasury""



Change the little two letter word "of" to the three letter word "for" and I think you might have the arrangement as the CB sees is.

JP Koning said...

Regarding ownership... the 12 district Reserve banks are actually owned by their member banks. Reserve bank shares cannot be sold in secondary markets, and membership requires share subscription. In many ways, district Reserve banks function as banking co-operatives, much in the same way that farmers join together to form agriculture co-ops. The Board of Directors of each Reserve bank is comprised of 9 individuals, 6 of whom are selected by member banks while the other 3 are appointed by the Board of Governors in Washington.

The point here of course is to point out that issues of control & ownership, private vs public, are complex and subtle - consolidating a nation's central bank with its executive branch is an esthetically satisfying shortcut but it cuts out most of the fine detail necessary to really understand how the system works.

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

JP

Consolidation is only in a general, theoretical sense to provide some general insights, never to describe fine details Suggesting that mmt consolidates to describe the fine details of any particular country is a straw man. As i said in my first comments above yesterday, if one is going to write a very detailed analysis of real world govt, Tsy, and cb operations, it is comparing apples to oranges to juxtapose this against the most general, theoretical mmt framework. I'm just not getting why it's so hard for some to imagine their might be different levels of specificity at work in different contexts in developing a school of thought.

Ramanan said...

"I believe that NCB's sell govt bonds denominated in euros to get the euros to fund expenditure. So the euros originate in different countries. The NCB have an institutional arrangement with the ECB to issue euro under these conditions. They can't just issue euro as notes or reserves."

Tom,

Careful. The Eurosystem has a decentralized structure for operations. The NCBs have no limits on how much notes they can create. The only limit is the amount of collateral banks can provide to their home NCB when their indebtedness to their NCB increases (such as when more cash is required by banks to satisfy their customers' demand).

JP Koning said...

STF,

Fair enough. As my reference I use Randall L. Wray's Understanding Modern Money which I bought on Amazon. Perhaps it doesn't go to the deeper "level of specificity" that you are alluding to?

AndyCFC said...

@ Ramanan
Out of curiousity any good ideas how the EZ gets out of this mess?(assuming the ECB will do nothing)

beowulf said...

"It's also interesting to note that in the US, Federal Reserve notes are "legal tender", which can be redeemed in "lawful money" issued by the Treasury.
"Lawful money" is coins, notes and bonds issued directly by the Treasury.
In essence, Federal Reserve notes gain value from being redeemable in Treasury money, and not vice versa."


That is inaccurate.

In 1933, Congress changed the law so that all U.S. coins and currency (including Federal Reserve notes), regardless of when issued, constitutes "legal tender" for all purposes. Federal and state courts since then have repeatedly held that Federal Reserve notes are also "lawful money."
http://www.federalreserve.gov/faqs/money_15197.htm

Peter said...

STF said:

"I'm just not getting why it's so hard for some to imagine their might be different levels of specificity at work in different contexts in developing a school of thought."

You're not being specific. That's the whole problem. You're taking the fine details and then throwing them out the window to satisfy your theory. When reality gets in the way of theory you guys throw out the reality and inject your theory. As many people have pointed out, this makes no sense. Which is it? Is MMT a theory? Or is a description of reality? Because if it's a description of some alternate reality then it's pretty useless.

Ramanan said...

AndyCFC,

I am not a fan of just parting ways. The Euro nations have always been tortured by the currency markets and it was one of the reasons to form something big so that they take more control.

The only solution according to me is to increase the spending and taxing powers of the European Parliament so that it can engage in substantial fiscal transfers. (effective making it a central government).

So this would involve huge transfers from Germany but people tend to think it is a loss for Germans which is incorrect because the income in Germany also increases due to higher activity.

Plans such as Euro Bonds simply do not work because there is no fiscal equalization payment mechanism in the plan.

Europe needs an Alexander Hamilton to save it as Robert McKinnon put it in FT recently.

Ramanan said...

Sorry I meant Ronald McKinnon

Rogue Trader said...

From Bank of Canada site:

"The Bank was founded in 1934 as a privately owned corporation. In 1938, it became a Crown corporation belonging to the federal government. Since that time, the Minister of Finance has held the entire share capital issued by the Bank. Ultimately, the Bank is owned by the people of Canada."

More interesting details here:
http://www.bankofcanada.ca/about/who-we-are/

AndyCFC said...

Thanks Ramanan yeah dont think they have much choice really. Wanted to make sure there wasnt something I had missed.

Yes i saw that FT article.

Tom Hickey said...

@ JP

Right. The Fed is a hodge podge pretty much on purpose, that is, to give a privately controlled institution government status. Since the Federal Reserve Act was passed in 1913 there have been revisions to the institutional structure. What exists now is a public private partnership affair, which government considers an agency but leaves it politically independent.

For all practical purposes, however, the regional banks are for settlement only, while it is the BoG that is the policy making body, within which the chair plays the dominant role by custom and the board acquiesces to the chair's decisions.

However, the privately controlled regional FRS banks select their officers and the presidents do have extraordinary power in that they are not appointed or approved in the political process but participate in the process of setting monetary on a rotational basis. I believe that beowulf has questioned the constitutionality of their representation on the BoG as mandated by the present institutional rules.

It is a mess that that needs to be revisited and revised, bringing it up to date, as all the controversy swirling around goes to show.

Tom Hickey said...

Peter, if this stricture were followed there would be no discipline of economics and little science. The purpose of a general theory is to simply the complex under general rules.

I know that people like Austrian economists dismiss macroeconomics for this reason, but macro is used in formulating economic policy and it going to continue to be. So there are going to be general theories that simplify the specifics.

As Milton Friedman said in essence, the black box (general explanation) is largely irrelevant. It's the output (reliability of predictions) that is significant.

y said...

Beowulf, yes you're right - the supreme court sees the two as equivalent/ the same.

It's still worth noting that the Federal Reserve act describes Federal Reserve notes as being "redeemable in lawful money".

It might be worthwhile to think about Treasury bonds as a form of money which the Treasury allows people to own for a limited period of time, rather than something the Treasury is forced to issue to get hold of Fed notes (or Fed reserves).

Tom Hickey said...

Ramanan: "The NCBs have no limits on how much notes they can create."

Then why don't they just create all the notes needed to spend and accept whatever as collateral as needed to do so?

Ramanan said...

Tom,

The NCB is acting as an accommodationist. It can't go and buy government bonds from the markets or from the government. It can lend just as much as banks need - given banks have good collateral. Even that limit has been crossed so now there is ELA.

In no sense the unlimited ability to print currency notes means the Greek NCB can solve the government's problem - because the government does not have an overdraft facility at the NCB in any circumstance - it has to directly be at the mercy of creditors. The Greek NCB cannot accommodate the Greek government.

Ramanan said...

Sorry should qualify. The Greek NCB can buy only as much as the ECB asks it to buy under SMP.

Peter said...

Tom, the problem with MMT is that it does not describe out operational reality as it claims to do. It in fact describes the theoretical world which MMTers want the monetary system to look like. I understand that MMT is trying to achieve specific policies, but the claim that MMT is just describing our operational reality is incorrect. MMT describes the theoretical world they are trying to push us towards.

STF's attempts to create a "general" and "specific" case are just more instances where MMT obscures language to distract from the fact that their reality = theory - reality. ie, theory and nothing more.

y said...

Actually, I think Mosler and Auerback might be mistaken when they describe the ECB as the the Eurozone's only "currency issuer".

Given that Euros are essentially government liabilities, it makes sense to describe Eurozone governments as currency issuers.

The only real difference with the US, for example, is that the ECB is tasked with controlling interest rates and inflation across the Eurozone *as a whole* - not within individual Eurozone countries. This means that government bond yields within individual countries can be pushed up to exorbitant levels by the market.

The fact that bond yields are exceptionally high in Greece (for example) doesn't mean that the Greek government can no longer "borrow" money - it simply means that they have to pay a very high rate of interest.

They could continue to do this ad absurdum. However, this would necessarily have a highly deflationary and distortionary impact upon the Greek economy.

In contrast with the Eurozone, the Fed has the task of controlling interest rates and inflation specifically within the boundaries of the US. As such, it has a concrete reason to control US government bond yields.

Amateur musings, comments appreciated.

Tom Hickey said...

Peter, MMT describes itself as a description of monetary operations in a general under a non-convertible floating rate system and and specifically as this applies in various countries. It builds a macro theory on this and other inputs, largely in the Post Keynesian-Minskian tradition. Finally, it formulates policy proposals for different countries based on this description and theory as it applies to those countries.

Many people have somehow gotten the idea that MMT is only an operational description. That is just not the case.

Moreover, its operational description should not be confused with popularizations of it either. It is laid out in various professional papers, many freely available at www.levy.org, www.cfeps.org, and www.epicoalition.org

Anonymous said...

Peter, reality is we live in plutocracies, this means that laws and institutional arrangements are bypassed (or changed) to accomodate the plutocrats.

All this nuances of 'operations' when things matter for real (ie. saving the status quo) are just bypassed. What't the point of caring about operations as if they mattered? They only matter in the cases the majority is screwed, they don't matter the rest of the time.


Don't make me laugh, constitutions being changed within hours in Europe by "democratic governments" by order of the eurocrats and we are talking about all this if it really was something very very important! Is laughable!

Guys, stop fooling yourself, law is what power says. I have yet to see one time when a war was stopped because the treasury "can't really spend without borrowing", a single one! Geez, USA blew up the gold standard just to do that and has been using MMT always they wanted to wage war and make the wealthy wealthier. Pure MMT for the rich.

And we are talking like if law did matter. Wake the fuck up! We are in the robo-signing world!

Who is the biggest fool here, MMT'ers or MMR'ers, a hard contest.

Tom Hickey said...

Normative religions and positive law are contrivances of the ruling elite that justify their rule, and the rulers change these institutions to suit their purposes. The EZ is a perfect example of this as austerity is used to suppress wages and discipline economies to the breaking point. As the breaking point is reached some ad hoc solution is contrived to relax the pressure just enough to keep the contrivance together so that the rulers can extract maximum wealth.

Democracy is only permitted to the degree that electorates can be manipulated or votes rigged. That's the history of it. Previously, the only way to avoid this was to strike out into the frontier, what Bucky Fuller called the "outlaw area" in which innovation took place. But there are now no frontiers left for the most part. So the option is to go underground.

y said...

Optimistic view, Tom. Are you not interested in trying to improve this democracy then?

y said...

"Who is the biggest fool here, MMT'ers or MMR'ers, a hard contest."

Well at least they both kind of know how the system works. That's something.

Matt Franko said...

Anon,

"We are in the robo-signing world!"

That's a keeper!

rsp

Anonymous said...

(I'm previous anon)

"y",

I think we can safely say that MMT has a political aspect in which they are trying to build up on the current functioning of the system. And in doing so they may oversimplify some stuff about how the system currently operates.

Whereas MMR says they are talking about reality, but they are not, because operational nuances are 'reinvented' or 'changed' if necessary at record speed. It's not like we are talking here about extreme technical problems trying to colonize Mars, all this can be change rewriting some laws and regulations here and there and pressing some keystrokes.

So both are right/wrong at the same time.

You can build a simple algorithm/parser which will tell you when MMT-like policies will be applied or not. Just include a check:
IF policy will stabilize or reinforce the status quo == apply MMT
IF nuances == ignore arrangements
ELSE do nothing

There it is, a very simple function to check whether MMT is or not applicable in the current system.

paul said...

This thread has been like a Seinfeld episode - a show about nothing.

Those involved in the discussion have been contorting themselves trying to find meaning in a jumble of words and operations to prove some arcane semantic notion of some natural constraint on the systems. They are looking at a problem with too many unknown variables to sort it out.

Maybe that's the fault of MMT for trying to show that the government doesn't have to borrow in order to spend. It may be useful to academics but the solution is, as always it seems, much simpler than that.

We are over-thinking this monetary operations thing. At least we lay-persons are.

Any system can be analyzed as a collection of systems that interact with each other within th emain system.

In this case we have two systems, the government and non-government, each a closed system in itself, which interact within the World system which interacts within the solar sytem which interacts within the galaxy and so on.

Some will say "but there's also the rest of the world" but that is immaterial and it's better to keep it simple. The rest of the world is simply another closed system that interacts with the non-government but it simplifies analysis to include it within the non-government. We can define the boundary of a system anywhere we choose. The boundary determines the nature and scope of the analysis.

Within the non-government we could define many other closed systems that interact. A household is a closed sytem, as is a business. they interact with each other within the system. An individual is a closed system. None of these entities can create money.

Define the closed as the system of dollars in the non-government and the spending that creates flows. Without flows (of dollars) there is no economy, at least not one that is beyond subsistence.

From the perspective of an observer within the non-government the government system is a black-box from which new dollars emerge through spending and leave through taxes. This leaves three options, deficit, surplus or balanced budget.

THERE IS NOTHING MORE WE NEED TO KNOW ABOUT THAT BLACK BOX TO ANALYZE THE ECONOMY.

We don't need to understand the workings of the internals of the black box. The folks that manage that system need to make sure that system functions to create the dollar flows that are needed by the non-government as dictated by the spending decisions of Congress.

Can that system cease to create money? Only by choice. There is no real-world constraint.

There are no natural constraints on the function of the black box. Any possible constraint exists by choice. The choices we make is part of another argument, they are unrelated to the capabilities of the system.

Can the black box run out of money? No. There is an infinite quantity of the resource needed - numbers.

Can higher interest rates make it so the black box can't create dollars? No. No matter how high the interest gets there will always be enough numbers at no cost to "pay" it. The black box creates the funds "necessary" to "pay" the interest.

TPTB have used the idea that we have to "repay" the dollars that the black box has provided us, including the interest to scare us into thinking we can't have good things.

Only rich people (those that engineer the constraints) get to have good things.

Any real attempt to "repay" the debt would be economic suicide for the 99.9% and they know it. There is no reason to "pay back" one penny, because any amount paid back in comparison to infinity is meaningless. The black box doesn't need it, and the money would just disappear back into the ether from where it came.

These navel-gazing discussions may be fun, but they don't have any meaning wrt real live human beings in the non-government. Plus, they are missing the entire point.

There is nothing inherently wrong with either system, government or non-government.

Only the management of them.

STF said...

Thank heavens Paul and Tom know what science is and thus what it means to create a school of thought. Too bad it's so far over the heads of so many others that even Paul/Tom can't get through to anyone--though it seems that many of the former have come to have a personal stake in not even trying to understand such things. So I'm not even going to try.

y said...

As far as I can tell, JKH is making a basic error.

He describes US currency (Fed notes and reserves) as a liability of the Federal Reserve, but fails to mention that it is also an "obligation" of the United States government (of which the Treasury is a part, by the way).

An "obligation" in this case is a liability.

US currency is therefore a liability of both the Fed and the Treasury. They are both parts of the government.

How or why would one "use" one's own liability?

Why would one store one's own IOUs in a little pile as "funds" for future expenditure?


So the Treasury engages in "cash management". Doesn't the Fed do this too? How fascinating. Who would have thought that institutional and accounting conventions might serve to obscure the underlying reality.

No wonder people get confused.

Bond auctions don't fail. The process of government selling and buying its own debt is a convoluted proceedure that simply serves to control interest rates.

The government doesn't need to collect its own liabilities as "funds".

paul said...

@Scott,

Thanks. That's a real compliment coming from you. You do the real heavy lifting.

@y

Looks like you have a pretty good understanding.

The more you seek to understand the more the "light comes on" and you see things that were hidden in plain view.

It's satisfying and empowering at the same time.

Life should be an open-ended journey.

Tom Hickey said...

y- "Optimistic view, Tom. Are you not interested in trying to improve this democracy then?

During the 60s and 70's much of the same thing was happening as is going down now, although then it was the war instead of a financial crisis. But young people were under the gun and saw no future in the status quo.

There were a lot of great leaders and public intellectuals at the time with excellent analyses and promising solutions, but nothing really came of it, especially after Reagan was elected in the US and Thatcher came to power in the UK and the neoliberal era began.

Previously a lot of people had figured out that if we wanted to live the life we wanted we would have to create it and the alternative movement was born. I spent the rest of my life in it. Then there were almost no alternatives. Now they abound.

There is a faction of the Occupy movement that is now following the same strategy of alternatives. It worked then and it will work now.

Widespread political change is slow because collective consciousness changes slowly. The avant-garde have always lived at the cutting edge, and that often meant either heading for the frontier or going underground.

Tom Hickey said...

Anonymous: "I think we can safely say that MMT has a political aspect in which they are trying to build up on the current functioning of the system. And in doing so they may oversimplify some stuff about how the system currently operates."

Can you unpack the specifics for us, or are you repeating what you heard somewhere.

What you say is belied by the extensive MMT professional literature were this is laid out in detail.

Of course blogs "oversimplify." So does all economics taught undergraduates. One doesn't have the prerequisite background until one enters grad school, and then just barely considering the curricula of most undergrad econ departments, which don't even offer a course in history of economics.

y said...

Tom, how did you 'live your life in the alternative movement'. Were/ are you literally living in a commune?

y said...

Paul, Tom, Scott, etc: am I right to say that US currency is a liability of both the Fed and the Treasury? If this is correct then it seems to totally undermine JKH's analysis.

Tom Hickey said...

y "Tom, how did you 'live your life in the alternative movement'. Were/ are you literally living in a commune?"

As grad student after completing my military service I was first involved in cooperative community, got involved in the anti-war movement, explored the intentional community movement, and studied progressive thinkers. Was was also associated with an experimental community that was more of a commune that a cooperative. During some of this time was was working on a master's thesis in social and political philosophy, which involved me in research in these area. After getting a PHD I taught at an alternative university. I have also been involved in several non-profits organizations along the same lines. So I managed to live my life at what I considered the cutting edge, which had been my goal. Having learned a lot about many other areas I considered key, I finally decided/realized that I needed to up my knowledge of economics and found MMT as the what I take to be at the cutting edge of macro and so here I am.

Tom Hickey said...

y — "right to say that US currency is a liability of both the Fed and the Treasury? If this is correct then it seems to totally undermine JKH's analysis."

All depends on whose books the liability is entered. Reserves and FR notes are liabilities of the Fed, coins and tsys are liabilities of the Treasury, I assume.

paul said...

@Y,

I don't get too far into the weeds on these accounting issues because I know that no matter how many opaque accounting transactions take place the non-government can't create it's own money.

The transaction chain you outline makes sense to me though.

The Fed creates a liability and an asset, and "loans" the asset to the Treasury.

The Treasury now has a liability and an asset, which is in turn given to the non-government in exchange for goods and services.

This leaves the Treasury with a liability to the Fed.

It appears both entities hold a liability.

The non-government does not.

But I'm not an accountant so hopefully someone more knowledgable about these things will chime in.

Oliver said...

no matter how many opaque accounting transactions take place the non-government can't create it's own money

Careful here. Most of what we consider money IS created endogenously in the non-government.

paul said...

"Careful here. Most of what we consider money IS created endogenously in the non-government."

This is another semantic twist to a complex argument.

No "persistent money", ie money without an off-setting liability is created by the non-government.

Would you rather hold $1000 in cash or $1000 in credit?

To say they are the same thing is a hasty generalization.

Further, all money (dollars) that can be used to extinguish USA federal tax liabilities are created through a system of banks that are part of the Federal Reserve System. The Fed is the lender of last resort.

Endogenous money is state money.

Endogenous money cannot be used alone to create nominal wealth for the economy as a whole.

Net wealth can only be created through fiscal spending (persitent money).

Tom Hickey said...

Net financial assets and therefore saving in net financial assets can only be created vertically since all horizontal transactions net to zero.

Horizontally, credit creates funding for consumption and investment as well as interest obligation and the possibility of increasing real assets through real investment. It is the later that drive the horizontal system, which is a process of "mining the future."

The vertical system is used essentially to offset saving desire so as to stability the integrity of circular flow at an optimal performance level.

paul said...

"…which is a process of "mining the future."

This is an excellent description of leverage, especially for the lay-person

paul said...

"The vertical system is used essentially to offset saving desire so as to stabili[ze] the integrity of circular flow at an optimal performance level."

The vertical system provides the means for nominal growth. Without it nominal growth is literally impossible.

My view is real growth cannot occur without nominal growth (under the current system), beyond some threshold of leverage at which the system becomes unstable (inevitable) and collapses, destroying the "value" of real growth.

So, the question is, if growth on the upswing is negated by losses on the downswing did any real growth actually occur?

Tom Hickey said...

"So, the question is, if growth on the upswing is negated by losses on the downswing did any real growth actually occur?"

What happens generally is that both real growth and nominal value increase on the upswing and nominal value decreases on the downswing while real growth slows or stops. But real resources created during the upswing are not destroyed when debtors default on loans or debt is written down. The result of downswings is that a lot paper gains disappear, debts are not paid and the real economy slows or contracts. But generally the real economy only slows.

STF said...

JKH,

Tom already essentially answered your question for me. But from an institutional economics perspective, currency issuer as used in MMT is about institutional authority. This concept is completely absent in your piece, save for the concept of "strategic currency issuer," which is fine but still doesn't go as far.

In the US, UK, Canada, etc., the institutional authority in the conduct of monetary operations is the national govt. As you said, these govts provide the CB and Tsy with the full scope of what they are forbidden and permitted to do. There is no authority above them.

In the Eurozone, this authority has obviously been given away by the national govt's (though, like a govt under a currency board, they could take this authority back, but not without large costs in the short-term at least; another example might be a govt operating under a treaty like NAFTA or the WTO). The ability to influence interest rates on the national debt is solely at the discretion of the ECB.

I don't know that Marshall and Warren have always referred to the ECB as the currency issuer, though they certainly have on occasion. Note that they are not academic economists and are often looser with language than I am on these matters (whereas I would be far looser with language related to their professions). I have noticed that quite often they have said that the ECB is the only one with the authority to ensure that interest on the national debt of member nations stays at or near risk-free levels. This in and of itself is a necessary though not sufficient condition itself to make one a currency issuer in the sense that MMT says "sovereign currency issuer." The latter generally refers to both the ability to create NFAs for the non-government sector and to do so without operational limit and without having bond markets bid the rate up beyond the risk-free rate; even as it’s rarely stated that specifically, that’s essentially what happens. If rates on national debt rise significantly beyond the risk-free rate, it's because this was allowed to occur--and we all (including you, I presume) agree that the ECB has this ability. Again, this presupposes instititutional authority as there is no promise made or obligation to any other authority or any other institution of conversion at a fixed price.

Note that Marshall and Warren (and others among us) have also frequently noted that the ECB is the one entity that in fact could do both--ensure that the nations of the Eurozone do not see interest on their national debts rise above risk-free levels and also can create NFA for the non-government sector without operational limit. Of course the latter would require the ECB's capital to go sufficiently negative, but it could do this operationally obviously. Let me also note that according to this definition, if all nations were under a gold standard, there would be no sovereign currency issuers.

Continued . . .

STF said...

Continued from above . . .

In the spirit of debate, I want to suggest that your characterization of the point of MMT's invocation of the general/theoretical consolidated view is incorrect. First, you debunk the notion of the Tsy as a currency issuer—but in MMT’s general/theoretical view, the Tsy is not the currency issuer. It is a lower institutional authority just as you described in your “second” view. There is no disagreement between MMT and you on that point. Second, you write,”the operational nature of central banking is comparable as between Federal Reserve and ECB monetary operations. Both banks are currency issuers.” But the Fed as currency issuer is a definition you have devised yourself—they “issue” currency as an asset swap for (mostly) Treasuries upon the desire of the private sector. To the extent that others—i.e., other economists, bloggers, the general public—the concept of central bank as currency issuer, it goes to the more popular view that the Central Bank “prints money.” As anyone who understands MMT should know, we have taken great pains to disabuse others of this interpretation of central banking since it is obviously incorrect and does a good deal of harm. Given the baggage that comes with the popular notion that the central bank “prints money,” it should come as no surprise that the central bank as “currency issuer” in the crude operational sense that it “issues the currency” as an asset swap is not the one we prefer. Hence the invocation of institutional authority as I’ve explained above.

In science, a general theory is the one with the fewest assumptions; it is not the one that attempts to describe details. As we stated in our response to critics, we are trying to provide the explanation with the fewest assumptions for why the following are true: (1) the currency issuer is not constrained in its ability to spend by creating “money”; (2) the issuance of bonds by the currency issuer is not for financing purposes; and (3) the interest on the currency issuer’s national debt is a matter of political economy, not whether or not there are bond market vigilantes. When Warren, Randy, Bill, Jan, etc., looked at the real world, these three points held true over and over again for governments spending and issuing debt in their own currencies under flexible exchange rates. (Warren profited handsomely from his discovery of these facts, as many know.) As much as we have been able to make out, the consolidated view of the Govt/Tsy/CB is the explanation of these facts with the fewest assumptions, and thus serves for us as the general case. If someone can explain these three facts with still fewer assumptions, then we’d be most interested in that. But that’s how science works; whether our critics want to acknowledge it or not, it is the accepted general theory that sets the paradigm others work within. While details and empirical tests are necessary to arrive at and continue to verify (or reject, as the case may be) the general theory’s logical conclusions, both are essential and necessary.

Continued below . . .

STF said...

Continued from above . .

Neither of your two “views” could possibly serve as a “general theory,” even as they could be very useful in empirical research that could verify/reject a general theory. As I said in my original comment, your piece compares apples to oranges, and from this understanding, a detailed description or a framework for creating one—as you’ve attempted to provide—is not a critique of a general theory. A general theory is rendered invalid by (a) failing the logic test in terms of its assumptions supporting the stated conclusions (i.e., showing that a consolidated Govt/Tsy/CB logically does not lead to (1), (2), and (3) above), or (b) the stated conclusions not being empirically verified (i.e., showing that in the real world a govt spending and issuing debt in its own currency cannot enjoy the benefits of (1), (2), and (3) above). You did neither.

Finally, to return to your question, in your piece you write, “without more qualification, it is counterproductive to be using identical vocabulary (currency issuer) that at one time can be applied to a country (strategic) and at another time be applied to a central bank (operational).” As far as I’m concerned, I have provided such “qualification, and it was always so in MMT. Our critics for whatever reason have always interpreted our intent differently (no matter how many times we’ve tried to explain what I just did once again above) while far more supporters have in fact interpreted our intent correctly (again, for whatever reason, and often with far less explanation). This is not about intelligence our lack thereof—some of the most intelligent people I have encountered still do not interpret MMT correctly—but it is what it is. MMT is attempting to build a school of thought, and all the parts that go with it; one of the most indispensable parts is the general “theory” of how the monetary system functions to arrive at the three points I mentioned above. Anyone that doesn’t recognize this doesn’t know what science is.

Best,
Scott

STF said...

Forgot to say that the above notwithstanding, I didn't see any details in your piece that I disagree with. In fact, your CTRB is similar to our "general theory," and arrived at much the same way as Mosler and the rest of us arrived at our consolidated view--going out and looking (and note how different this process is from the neoclassical economics view of theory being entirely deductive).

Best,
Scott

paul said...

Tom,

I see you're taking a beating over at the MMR comment section.

Sorry you have to take abuse for something I wrote (something pretty innocuous in my view.) WATB's…

Tom Hickey said...

Hey, I thought I was winning. :)

paul said...

You're winning with class for sure.

STF said...
This comment has been removed by the author.
Senexx said...

Macro-functionality (levels of abstraction) versus Micro-functionality (case specific).

MMT = Universal
MMR = US only

And as in politics micro-roles make great politics (anecdotes) to take on the macro-view being espoused.

STF said...

Dear Brett--in the spirit of debate and discussion, since it seems to me after reading from the past few days that is where you are, too. There will be several posts since your comment was rather lengthy and so is my reply. I agree with you that the blogs are not the best venue for this. See my comments in the last entry below. Best wishes, Scott

“In the natural/hard sciences (e.g. physics, chemistry and biology) the aim of practitioners is all about detailing the empirical so that truth statements can be grounded in fact. People like Newton and Einstein did not skimp on the details or pivot the discourse around counterfactual examples.”

It’s about detailing the empirical work and building a theory that is general (to the degree possible) and then continuously testing this theory. We did not skimp on the details. This confuses the detailed explanations of the real world in, say, my academic papers with the general theory in, say, Randy’s book. It’s akin to claiming the insights of Darwin are not useful because he didn’t go into the details. Nobody says that—they say there are details to complement his general insights. And where he did get some details incorrect given his more crude investigatory tools it is also recognized these thus far do not distract from the basic “truth” of his general insight.

“A scientific theory aims to get the facts correct providing whatever level of technical detail necessary to do so. “

Yes, and how much detail is necessary to do so? We’ve been able to understand and even predict virtually all of the events of the last 15 years in the major economies. Mosler made hundreds of millions from the basic general model that he came up with after looking at the real world. Cullen wrote about a year ago that our analysis of the Eurozone amounted to the best prediction ever made, though I suppose he recants that now.

“The purpose is to increase knowledge and NOT MAKE ANY “assumptions” in the process.”

It’s not possible to do value-free investigation. There are always assumptions made about what to include or not include, which methodology to use, etc. Assumptions and values cannot be avoided, ever.

STF said...

Continued . .

“Science is about determining whether particular “assumptions” are right or wrong: in doing so sometimes a scientist and his/her peers believe that certain matters can be considered as laws and/or factual statements about XYZ.”
Agreed. And assuming that a currency issuing government finances itself in any sense other than a self-imposed legal one or a definitional accounting one is counterintuitive and false and the source of much pain in the world.
“An influential book by JMK was called the ‘General Theory’. Why? He wanted to communicate that the orthodox full employment story is the “special” case and his underemployment equilibrium is the “general” case. The general case is the one which exists. In describing that general case it is acceptable for an analyst to simplify discussion when writing for the layperson or when providing an overview for the specialists.”
As Paul Davidson explains, JMK’s point was to get rid of “restrictive” assumptions that made the “classical” view a special case. He wanted a “general” theory to uncover the true nature of a monetary economy. MMT wants to get rid of restrictive assumptions that our understanding of monetary operations and recognize that real-world “constraints” are self-imposed only, QE doesn’t work, etc.
“The problem is forwarding dictums like “fiscal receipts cannot be spent and never funding operations” under the “conglomerated State” framework cannot be a “general” case. That framework and the counterintuitive statements it leads to are confused/wrong i.e. describes no world.”
Perhaps counterintuitive to you. But analysts are beginning to figure out this is the true nature of sovereign currency issuers. Even a neoclassical like Krugman now talks about how the crucial difference is the ability to create one’s own currency; he admits that prior to the crisis nobody (at least among neoclassicals) could explain why Italy’s interest rates would rise above the risk-free rate and Japan’s would not.
And if you create your own currency without promising to convert, it’s counterintuitive to have an economic theory that says you must finance your spending by taxing or selling bonds or that you have to worry about bond market vigilantes. When you believe stuff like that, you do things like give up your monetary sovereignty and join currency unions without fiscal unions.
Yes, one can be technical to a fault (i.e., JKH) and disagree on the basis of the argument that the liability side is always about funding, but that’s not the paradigm we’re disputing, so that criticism is off the mark—I have no problem being that technical with people that can handle it. Most can’t, though. And as I explain below, those details complement, rather than contradict, MMT.

Continued . .

STF said...

Continued . . .

“JKH’s post describes the system that exists: I think that is in the scientific spirit”

I agree. He describes the details of the system much like I have in the past in papers and posts JKH himself has praised on several occasions. In fact, JKH recently said as a comment on one of my posts, “Excellent description of monetary operations, as is your standard. But you labor under two huge disadvantages in the debate. What you say is understandable.”

Details are not a criticism of MMT’s core unless they demonstrate that a currency issuer under flexible exchange rates is constrained by more than self-imposed constraints operationally, or that there is, say, a transmission mechanism from open market operations directly to spending. Those sorts of things are the core, and unless you find details to contradict them, you haven’t critiqued MMT. As I said, apples vs. oranges.

Details and descriptions of “the system that exists” have thus far complemented MMT. Nobody criticizes JMK’s GT by saying, “the multiplier isn’t 1/(1-mpc)! There’s taxes, imports, price changes, interest rates, etc. I’ve overthrown the GT!” But that’s basically the extent of what you’re saying with respect to MMT. Note that Minsky thought Keynes had left out a financial theory of capital investment; he didn’t critique Keynes, he offered his work as a complement because he knew he had nothing to say that overthrew the key insights of Keynes. In the late 1990s/early 2000s, I noticed there were details and sources not yet described in MMT, and I wanted to see where those took me; I then wrote my dissertation and papers like “Timeliness and the Fed’s Daily Tactics,” “Setting Interest Rates in the Modern Money Era,” “Interest Rates and Fiscal Sustainability,” “The General Principles of Modern Central Bank Operations,” and “The Social Fabric Matrix Approach to Central Bank Operations.” These presented some details and framing that I had not seen in MMT publications. I also integrated the payments system more carefully, which I had not seen done yet as most in PK were focusing on reserve requirements, including MMTers. But these were not criticisms of MMT; they were complements, since they did not overthrow the basic insights of MMT and in fact further validated them.

JKH’s piece is obviously filled with details; I didn’t see any I didn’t already know, but if there were, these again are complements to MMT unless you can use those details to overthrow the central insights in the general MMT framework. There is nothing in JKH’s piece that does this. Indeed, where does one go with all the details in JKH’s piece to understand current events? As I noted above, the key insight for many into the different outcomes in terms of interest rates on sovereign debt (as just one important example) comes from what JKH calls the “contingent operational perspective,” which is basically the sort of general view MMT has been based upon. From that perspective it is understood what governing institutions can and cannot do under different monetary regimes (hierarchy of authority in the monetary system). Specific details from specific countries in terms of how they have arranged these do not contradict this “contingent operational perspective” unless it shows this perspective itself to be wrong. The latter could happen, but thus far the details arrived at from what JKH calls an “operational perspective” do not.

There are cases where we have had some details wrong. I can think of about 5 instances off the top of my head where later I found out some detail in my published work was not correct. These do not challenge my work since they do not challenge the central insights of my work; my better understanding of details thereafter complements my work.

STF said...

Continued . . .

“A theory which tries to describe a hypothetical world that does not exist is not science. There is a word for such endeavours: it is called science fiction or sci-fi for short.”

A theory that provides insight into the true nature of the monetary system is science. If we haven’t done that, then why does JKH say that providing a correct description of monetary operations is “my standard”? Why does Lavoie say “if I have objections to the neo-chartalist views on money creation and the mechanics of the payments system, they don’t arise from questions of content . . .” and that the “studies by neo-Chartalists on the clearing and settlement system” have vindicated the horizontalist position? Why does Lavoie also say later that when he first heard Mosler talk about the fed funds market he thought he was a crank but now understands reality of how that market works cannot be otherwise?” It seems you and Lavoie don’t agree on the relevance of MMT.

In your critique of us you write "everyone wants an alternative to fiscal austerity but MMT is not it". Interestingly, JKH’s CTRB is essentially a description of how the MMT general case would look in the real-world (not to presume, but I have my suspicions about where he might have gotten the idea). But in response to JKH you say that you “recommend that everyone give serious attention to the Central Treasury Bank as a blueprint for reform.” So, which one is it? MMT describes the nature of the system as it is aside from a few additional assumptions/details that are in fact self-imposed constraints and serves as a “blueprint for reform” of both our current understanding and our institutional structure? Or, the blueprint is “counterintuitive” and could never be the alternative to austerity? You have now suggested that both are true.

STF said...

continued . . .

Regarding criticisms of MMT in late 1990s/early 2000s, please note that there were numerous attempts by MMT economists to either critique the paper as a referee or in response to the published paper. In the case of refereeing, the comments at times were ignored by the editor. In the case of responses, they were on more than one occasion sent to referees (purposely?) that would not let through the key points of response. (I know first-hand one of the papers was sent to an MMT economist to referee—the economist offered comments since the paper was a mischaracterization, but the editor ignored them. I saw all of this happen in real time, and it was not the only time this happened.) There were attempts made to engage, but often--not always, but enough-- they were thwarted or distorted, and eventually the entire process became frustrating.

In our own view, it is we that have been outcast, and that has been a significant part of our frustration that others attribute to us. It has been our practice not to write criticisms of the work of other PKs aside from responding to criticisms laid upon us; there’s too much important work to do to eat our own. But they’ve done it to us over and over again, and when we respond, we are usually ignored, thwarted, or our suggestions that our critics have gotten our arguments wrong are waved away as “what we always say.” But this isn’t some game of hide and seek—if you get the argument right we will tell you. If you don’t we will also tell you. What would you expect us to do? Many get it wrong, many more get it right. I don’t know what the reason is, as there are all ranges of intelligence on both sides. Some of it is surely the fault of MMT for being both too drastic a change to the traditional views of both neoclassical and heterodox economists while also not using language/terms/frameworks that could be readily understood by many without a deep dive into the literature and perhaps still further engagement with authors. And experiences from the late 1990s/early 2000s made some authors less willing to do this, feeling they had heard and responded to the same mischaracterizations more times than they cared to; perhaps they were wrong to do this, but they wanted to move on pursuing their own growing research agendas rather than what in their view amounted to putting out the same fires over and over again.

So, there is a long, somewhat complex history that brings many reasons for difficulties in debates with MMT, and I think blame goes both ways. But I also think the present time is one in which PK is ready to breakthrough and also has a window to do so, and thus it is also time to build bridges where possible to create the best possible chance of doing this. A few of us in MMT have already set up face-to-face meetings to begin the process of beginning anew with real attempts to understand one another and see what can be learned from each other and built upon. I don’t know how far this will go, but I think it will be positive overall regardless. Those that want to join in at some point in the same spirit are welcomed with open arms.

And not posting at the site of JKH's original site is not out of disrespect for JKH or you. You'll have to ask others why several of us do that, though. I prefer not to get into it.

Done!

STF said...

Sorry I didn't get the spacing right in the second comment in my thread here.

Anonymous said...

The only reason the central bank would allow bond yields to rise significantly is so as to control inflation.

Higher yields don't mean the Treasury "runs out of money", they just mean the Treasury pays more interest.

Given the central bank's goals, it is not going to allow yields to rise significantly if inflation is low and unemployment is high.

Yields will be allowed to rise when inflation is higher than desired and unemployment is low.

Under these circumstances MMT advises raising taxes or cutting spending anyway.

Bond sales are simply a mechanism for adjusting interest rates and controlling inflation.

Vassilis Serafimakis said...

Ramanan wrote the following on March 20, 2012, at MonetaryRealism.com (http://monetaryrealism.com/jkh-on-the-recent-mmrmmt-debates-2) :

QUOTE MMTers tend to define the budget deficit as the “national saving”, a completely unnecessary step. It’s wrong because the budget can be in deficit and the current account in a bigger deficit which means the private sector is in deficit! An internal contradiction and self-inconsistency. Because with the domestic private sector in deficit in the scenario, the budget deficit in the scenario can hardly be called “national saving” – even if “saving” was restricted to accumulation of financial assets.

National accountants simply add the saving of all resident sectors including the government to get the national saving – which is self-consistent. UNQUOTE

I thought the full term MMT uses is "Non-banking, private sector saving" and not "national saving". Perhaps someone somewhere wrote "nat'l accounting" but who can put this to rest? I do not know what are "government savings" exactly. Perhaps money that the government says "We will create those tomorrow morning" ?

Anonymous said...

I think JKH has been bamboozled by the smoke and mirrors. He doesn't seem to realise that currency is a tax credit. It's a government IOU.

The Treasury acquiring and storing its own IOUs as "funds" is about as meaningful as the Federal Reserve doing the same. The accounting simply serves to keep track of what comes in and what goes out.

But it obviously confuses some people.

Some little details that may be of interest: Fed notes bear the Treasury stamp and signature of the Treasury secretary. The Fed hands over all of its "profits" to the Treasury. I do believe this suggests a different relationship to that which exists between the Fed and commercial banks.

The Fed and Treasury are both different parts of the same government. Each has a task given to it by Congress. The Treasury looks after fiscal matters, the Fed predominantly looks after interest rates and thereby tries to manage inflation.

When the government wants to spend, it spends.

Yes, there is a proceedure called bond issuance which serves as a mechanism through which Treasury and Fed policy can interact. Sometimes bond yields go up (Fed makes them or lets them go up), sometimes they go down (Fed makes them or lets them go down). The government can keep spending regardless, if it wants to.

Sometimes, of course, it makes sense to reign in spending - but not because the government might somehow "run out of money". If inflation is too high then higher bond yields might also be a good thing (if one believes that higher interest rates are a good way of reducing inflation).

But its easy to see how the whole thing can bamboozle people.

Tom Hickey said...

@Vassilis Serafimakis

Government fiscal deficit (G-T) = non-govt surplus (saving), that is, (S-I) + (X-M). That is the general principle based on accounting identity. That has to be deconstructed by reference to the accounts from which it is constructed to arrive at distributional specifics. But it could be that a lot of the saving of net financial assets injected by the deficit is in the KAS. Ramanan is right about that, but MMT never implied that this is not the case as far as I know.

The kerfuffle is about the use of "national saving" and "net saving," which critics say that MMT economists tend to use too loosely without technical specification. If people are confused by the use of terminology, as appears to be the case, I'm all for clearing it up.

Tom Hickey said...

"But its easy to see how the whole thing can bamboozle people."

Cynics say it is designed to do just that.

Moreover, the actual operations have to be teased out. This is not been exactly transparent, and only recently are the details becoming readily available to non-experts.

paul said...

MMTers tend to define the budget deficit as the “national saving”…

It's national saving in any normal use of the word 99.99% of the time.

… It’s wrong because the budget can be in deficit and the current account in a bigger deficit which means the private sector is in deficit!…

It's only wrong because Ramanan doesn't recognize the real possibility that national savings (an incremental flow) could be negative but that's still "saving". (Although extremely unlikely to occur so why dwell on it?)

…An internal contradiction and self-inconsistency. Because with the domestic private sector in deficit in the scenario, the budget deficit in the scenario can hardly be called “national saving”…

Mathematically consistent. Ramanan just has trouble understanding the concept of negative savings and by extension negative numbers. It would be merely a flow out of savings rather than into savings.
His claim, if applied to the stock of savings could only be true if the private sector could somehow spend more money than was in existence (created by the government). Systems have boundary conditions.

…– even if “saving” was restricted to accumulation of financial assets."

Ramanan continues to run in circles, trying to find the beginning.

It is likely that I have committed some semantic errors in my comment.

Anonymous said...

I think the MMRist confusion over this can be traced back to MMTer's use of the the phrase "self-imposed constraint".

This simply means that instead of going from A directly to B, govt decides to add the additional step of going through C.

This additional step has absolutely no effect on the actual outcome or possible outcomes.

Imagine deciding that you would from now on always say the word "hat" before you took a pee. That's a self imposed constraint.

It ends when you decide not to do it anymore.

That's what bond issuance is.

paul said...

@ Anonymous

I think the MMR confusion goes much deeper than that…

But that's one aspect of it. They have an ideological bent, which they seem to need to project upon MMT.

When I say they, I mean mainly one person.

Some of the others are just useful idiots, over there because they've been rejected by most everyone else (not beowulf or Michael S., they have real chops).

But then I have a low tolerance for bullshit and someone was mean to me on the internet so, take anything I say with a grain of salt…

Ramanan said...

"It is likely that I have committed some semantic errors in my comment."

Yes, that's right - "some semantic" should not have appeared in the above statement.

Anonymous said...

Ah, Paul and Ramanan are poking each other again. Everything's back to normal.

paul said...

"Yes, that's right - "some semantic" should not have appeared in the above statement."

:-) That was pretty good.

Anonymous said...

JKH's extraordinary revelation that the Treasury issues bonds when it deficit spends is clearly causing a stir over at MMR.

They appear to be on to something that MMTers have so far completely overlooked.

It would appear that this previously concealed fact may well bring down the entire edifice of MMT thought.

Given that the government actually issues bonds (who would have thought?), MMT descriptions and arguments are in all likelihood completely wrong.

Thankfully the ever precise JKH will no longer stand for MMT's ideologically-driven sloppiness and is determined to speak truth unto MMT.

AT last, someone is prepared to overhaul MMT's deeply misleading analysis and bring back the profound clarity of mainstream smoke and mirrors.

So now we know:

MMT describes a fantasy world in which the government faces no 'solvency risk', whereas MMR describes the real world in which the government faces no 'solvency risk'.

MMT describes a crazy made-up statist dreamworld in which the government spends as it wants to, whereas MMR describes a cold hard real world in which the government spends as it wants to.

The difference may be subtle and precise, but it is extremely important.

Once you connect all the dots, the kicker is that it's a total game changer. In MMT's imaginary world the state is brought back to "centre stage", whereas in MMR's real world banks are much more important and therefore there is no rationale for the JG.

It's just how it is, and that's a good thing.


As a result of their pioneering research, MMRists have come to the deeply insightful conclusion that the government may well have to cut spending, raise taxes, or raise interest rates if inflation is too high. Shocking, I know.

They have also revealed the stunning fact that parts of the government may not always pursue the best policies, and may even pursue policies that are totally counterproductive! Amazing.

Oddly enough these brilliant insights have completely eluded second-rate MMT thinkers thus far - probably because they're all closet communists who are more interested in politics than economics and are really just taking credit for other people's work.


It's good that these MMR guys are doing such groundbreaking and original work, and thereby helping MMTers to understand where they've been getting it so wrong up until now.

Anonymous said...

To Brett Feiberger:

Your confusion regarding MMT statements derives from the fact that you see government currency as "funds" which the government acquires and then spends, whereas in actual fact all government currency is a government IOU, or tax credit.

To explain: Let's say you issue some IOUs, printed on paper. If you then "borrow" those IOUs back, do they serve as funds which allow to spend?

Only if you don't know what the meaning of "IOU" is.

So then, why would you borrow your own IOUs?

To maintain an interest rate.