An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
"ROMNEY: And the answer is we’re just making it up. The Federal Reserve is– is just taking it and saying, “Here, we’re giving–” it’s just made up money. And– and this– this does not augur well for our economic future. No. I mean some of these things are complex enough it’s not easy for people to understand, but your– your point of saying bankruptcy usually concentrates the money. [Ed: WHAAAAAAAAAAT?!?!?!?]
RMM Translation: “Don’t tell anyone this, but I actually do understand and agree with Monetary Sovereignty. The federal government just makes up dollars. It doesn’t need to tax. It doesn’t need to borrow, especially since the Fed buys nearly all the debt."
Rodger draws the conclusion that Romney knows what is going on, BUT READ THE ROMNEY PARAGRAPH IT IS INCOHERENT.... there is NO EVIDENCE that Romney knows what is going on in his statement, RATHER the EVIDENCE is that Romney is INCOHERENT on this issue... scrambled eggs.
@Matt, I basically agree. I don't think Romney really gets it. He thinks the FED is "printing" money from no-where but he doesn't realize that's just how it works. He thinks the FED is doing it out of desperation and that it will all come to an ugly end when desperation is exhausted.
"MALE VOICE: The debates are gonna be coming and I hope at the right moment you can turn to President Obama, look at the American people and say, “If you vote to reelect President Obama you’re voting to bankrupt the United States.” I hope you keep that in your quiver, because that’s what’s gonna happen.
MITT ROMNEY: Yeah. Yeah. There’s– the former head of– Goldman Sachs, John Whitehead– was also the former head of the New York Federal Reserve and– and I met with him and he said, “As soon as the Fed stops buying all the debt that we’re issuing–” which they’ve been doing. The Feds buy like 3/4 of the debt that America issues.
He said, “Once– once that over– that’s over,” he said, “we’re gonna have a failed Treasury auction. Interest rates are gonna have to go up. You know, we’re we’re living in this borrowed– fantasy world where– where the government keeps on borrowing money.” You know, we– we borrow this extra trillion a year. We wonder, “Well, who’s– who’s loaning against the Treasury? The Chinese aren’t loaning to us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us a trillion?"
Let's say "the market" wants higher interest rates on govt bonds, either because it thinks that: (a) the govt is going to default (dumb), or (b) spending is too high relative to potential future output so inflation is inevitable at some point (not so dumb).
So, let's say that as a result of these calculations "the market" demands higher rates - but the Fed says NO.
How is that pessimism going to express itself?
Inevitably, it will eventually have to come out through the exchange rate.
If "the market" can't get the higher yields that it demands, the result will eventually be a sell off of the dollar - that is, investors will move their capital into other currency zones.
As a result, instead of paying higher rates, the country will have to deal with currency depreciation and higher import prices - i.e. inflation.
Right. The way that the MMT economists put it as that while solvency and affordability are not the issue, the only constraint being real resource availability, price level is a nominal constraint.
This is indicated by the domestic inflation rate and the fx rate externally. Change in the price level domestically and currency revaluation are two sides of the same coin, and they represent the relationship of the monetary and the real.
agreed, but MMTers argue that you can control all forms of domestic inflation through the use of different 'tools' - i.e. fiscal policy, regulation, etc.
- But how do you control inflation generated by a sudden depreciation in the exchange rate?
MMT answer: you can't really , all you can do to preserve "price stability" is to increase the number of people in the JG "buffer stock" - that is, increase private sector unemployment by reducing expenditure or raising taxes.
The rationale is that when the fx rate falls, exported goods become less expensive and exports go up, increasing domestic employment, and imports fall as they become more expensive, bring jobs back to the home country.
The country that had a favorable trade relation in real terms loses it but gains a favorable relationship in terms of employment. So the system is self-correcting in this view.
"that is, investors will move their capital into other currency zones. "
But I believe that most (if not all) of these USD reserves are held as Official Reserves.
iow, there are no "investors" that hold the USDs, there are "governments and their banks" that hold the USDs in Official Reserve accounts at the US Fed...
So when you say "investors will move their capital" I dont think that is possible...
The way that the ITAs work, if a US subsidiary of a foreign corporation has USD balances in it's US bank account that is the same as if a US corporation had USDs in it's US bank account...
iow Toyota USA is THE SAME as General Motors as far as the ITAs are concerned...
iow You can't say "General Motors will take its dollars to Europe" or vice versa... doesnt work that way imo...
Looks like the only thing that can happen at this point is that foreign GOVERNMENTS can start to buy US REAL goods and services on behalf of their own citizens...
If you have a few billion in dollar assets and decide you want out, you sell your dollar assets for foreign-denominated assets (inc currency).
That's what 'moving capital into foreign currency zones' means in my understanding. You don't have to physically move any dollars abroad, you just have to sell them.
Those USD are going to remain at the Fed in someone's account as either tsys (savings account) or reserves (demand account) until they are spent or invested in the dollar zone. And as Matt says, the owners of those accounts are either banks that are in the club or govts. TINA
14 comments:
They don't fight a class war out on some grassy battlefield somewhere. It happens behind closed doors with millionaires talking to millionaires.
RMM jumps to conclusions here:
"ROMNEY: And the answer is we’re just making it up. The Federal Reserve is– is just taking it and saying, “Here, we’re giving–” it’s just made up money. And– and this– this does not augur well for our economic future. No. I mean some of these things are complex enough it’s not easy for people to understand, but your– your point of saying bankruptcy usually concentrates the money. [Ed: WHAAAAAAAAAAT?!?!?!?]
RMM Translation: “Don’t tell anyone this, but I actually do understand and agree with Monetary Sovereignty. The federal government just makes up dollars. It doesn’t need to tax. It doesn’t need to borrow, especially since the Fed buys nearly all the debt."
Rodger draws the conclusion that Romney knows what is going on, BUT READ THE ROMNEY PARAGRAPH IT IS INCOHERENT.... there is NO EVIDENCE that Romney knows what is going on in his statement, RATHER the EVIDENCE is that Romney is INCOHERENT on this issue... scrambled eggs.
rsp,
@Matt, I basically agree. I don't think Romney really gets it. He thinks the FED is "printing" money from no-where but he doesn't realize that's just how it works. He thinks the FED is doing it out of desperation and that it will all come to an ugly end when desperation is exhausted.
Adam right more incoherence:
"MALE VOICE: The debates are gonna be coming and I hope at the right moment you can turn to President Obama, look at the American people and say, “If you vote to reelect President Obama you’re voting to bankrupt the United States.” I hope you keep that in your quiver, because that’s what’s gonna happen.
MITT ROMNEY: Yeah. Yeah. There’s– the former head of– Goldman Sachs, John Whitehead– was also the former head of the New York Federal Reserve and– and I met with him and he said, “As soon as the Fed stops buying all the debt that we’re issuing–” which they’ve been doing. The Feds buy like 3/4 of the debt that America issues.
He said, “Once– once that over– that’s over,” he said, “we’re gonna have a failed Treasury auction. Interest rates are gonna have to go up. You know, we’re we’re living in this borrowed– fantasy world where– where the government keeps on borrowing money.” You know, we– we borrow this extra trillion a year. We wonder, “Well, who’s– who’s loaning against the Treasury? The Chinese aren’t loaning to us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us a trillion?"
So, it's official? We can break down & sob inconsolably in our beers?
The level of discussion in the highest levels of government is far lower than even Stockman observed, ~30 years ago?
" than even Stockman observed"
He goes in the moron bin wrt to this too Roger:
http://mikenormaneconomics.blogspot.com/2012/09/the-best-thing-ronald-regan-ever.html
rsp,
Let's say "the market" wants higher interest rates on govt bonds, either because it thinks that: (a) the govt is going to default (dumb), or (b) spending is too high relative to potential future output so inflation is inevitable at some point (not so dumb).
So, let's say that as a result of these calculations "the market" demands higher rates - but the Fed says NO.
How is that pessimism going to express itself?
Inevitably, it will eventually have to come out through the exchange rate.
If "the market" can't get the higher yields that it demands, the result will eventually be a sell off of the dollar - that is, investors will move their capital into other currency zones.
As a result, instead of paying higher rates, the country will have to deal with currency depreciation and higher import prices - i.e. inflation.
Agree or disagree?
Right. The way that the MMT economists put it as that while solvency and affordability are not the issue, the only constraint being real resource availability, price level is a nominal constraint.
This is indicated by the domestic inflation rate and the fx rate externally. Change in the price level domestically and currency revaluation are two sides of the same coin, and they represent the relationship of the monetary and the real.
Tom,
agreed, but MMTers argue that you can control all forms of domestic inflation through the use of different 'tools' - i.e. fiscal policy, regulation, etc.
- But how do you control inflation generated by a sudden depreciation in the exchange rate?
MMT answer: you can't really , all you can do to preserve "price stability" is to increase the number of people in the JG "buffer stock" - that is, increase private sector unemployment by reducing expenditure or raising taxes.
The rationale is that when the fx rate falls, exported goods become less expensive and exports go up, increasing domestic employment, and imports fall as they become more expensive, bring jobs back to the home country.
The country that had a favorable trade relation in real terms loses it but gains a favorable relationship in terms of employment. So the system is self-correcting in this view.
y,
"that is, investors will move their capital into other currency zones. "
But I believe that most (if not all) of these USD reserves are held as Official Reserves.
iow, there are no "investors" that hold the USDs, there are "governments and their banks" that hold the USDs in Official Reserve accounts at the US Fed...
So when you say "investors will move their capital" I dont think that is possible...
The way that the ITAs work, if a US subsidiary of a foreign corporation has USD balances in it's US bank account that is the same as if a US corporation had USDs in it's US bank account...
iow Toyota USA is THE SAME as General Motors as far as the ITAs are concerned...
iow You can't say "General Motors will take its dollars to Europe" or vice versa... doesnt work that way imo...
Looks like the only thing that can happen at this point is that foreign GOVERNMENTS can start to buy US REAL goods and services on behalf of their own citizens...
Look at the bottom of this spreadsheet:
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
about 4 out of 5 $T is Official Reserves here, and I submit the rest while not "official" yet, is "on its way to becoming official".
They cant get out of this...
rsp,
ie They cant get out of this via a purely FINANCIAL transaction. rsp,
If you have a few billion in dollar assets and decide you want out, you sell your dollar assets for foreign-denominated assets (inc currency).
That's what 'moving capital into foreign currency zones' means in my understanding. You don't have to physically move any dollars abroad, you just have to sell them.
Those USD are going to remain at the Fed in someone's account as either tsys (savings account) or reserves (demand account) until they are spent or invested in the dollar zone. And as Matt says, the owners of those accounts are either banks that are in the club or govts. TINA
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