Do I owe this woman an apology?

[Lone Wolf]

It's starting to seem to me that MMT assumes that central banks are only permitted to expand the money supply by purchasing government debt.

Yes! Now you're starting to understand. That's what a fiat currency is. The examples you've given aren't fiat.

Good, this'll really help our terms match up.  The trouble I'm having is that MMT is presented as a model for how the monetary system actually works.  Yet I don't see how it models the fact that central banks hold a lot of gold and (recently) lots of mortgage-backed securities.  I also don't see how it models things like the BoJ's purchases of corporate bonds, stocks, and REITs.  And it really doesn't seem to match up with how the Euro works.

As for the United States, The Fed's balance sheet is 55% Treasury debt.  The Fed printed money out of thin air for the other 45% as well.  If I understand correctly, MMT doesn't consider that other 45% of the balance sheet to be the product of true "fiat currency".  Does this mean that MMT considers us to be 55% fiat and 45% asset-based?

If MMT requires the central bank to exclusively purchase government debt in order to offer a meaningful model, just say so.

It doesn't require it exclusively. But, if the government is fiat, that's exactly what happens.

I see.  If this is the case, I'm struggling to come up with an example of a modern currency that fits MMT's definition of "fiat" then.  We've established (I think) that the balance sheets of the United States and the Bank of Japan don't match up.  And correct me if I'm wrong, but I get the impression that you view the ECB as being more of a gold standard in drag than managers of a fiat currency.  So what is a good example of a country that fits MMT's description of a fiat currency?

LW, I think you are so close to figuring out how a fiat currency works. You just need to stop thinking about fiat currencies as being backed by anything. Well done!

Let's see whether we can converge on what it means for a currency to be "backed by" an asset.

We routinely buy and sell Treasuries to expand and contract the money supply.  These bonds come with a promise to pay interest and ultimately return the lender's principal at a later date.  The issuer of these bonds (the US government) will pay you back either with newly-borrowed money or with taxes confiscated from another citizen.

If we look at something like the Bank of Japan's corporate bond purchases, the only difference I see is that the issuer (some corporations) will pay you back with newly-borrowed money or actual revenue they earn from selling goods and services.

Would you consider the currency to be backed by an asset in the first case, the second case, both cases, or neither case?

[moda0306]

I wonder if the fed purchasing non-treasury financial assets with printed money really means it's "backed" by those assets.

To me, "backing" implies convertability, and if the fed never has to allow us to convert our dollars to gold, MBS's, etc, at the rate that is guaranteed, is there any real backing?

I could be totally off on this... just trying to toss my limited perspective out there.  I think MMT describes "the way fiat currency works" first and foremost, without the dumb asset purchases of the fed outside of treasuries... maybe it should hit that point more, but I think it helps to FIRST understand what QE truly is before trying to figure out what is fundamentally being done when the fed buys other stuff.

[Gumby]

The trouble I'm having is that MMT is presented as a model for how the monetary system actually works.  Yet I don't see how it models the fact that central banks hold a lot of gold and (recently) lots of mortgage-backed securities.

I think the point is that MMT describes how our fiat currency works, and could continue to work, without any tangible assets backing it. Remember, all a fiat currency is is a currency that isn't convertible to anything at a specified amount. Therefore, a fiat country doesn't need to have MBS or gold in its vaults to back its currency. If we were trying to make our currency convertible to something, we would need to hold certain assets. But, a fiat country obviously has the freedom to buy up assets if it needs to in a pinch. The Fed holds MBS and gold, but it doesn't need to buy those assets to function. Though, it probably finds the gold useful for interfering with the gold market

I also don't see how it models things like the BoJ's purchases of corporate bonds, stocks, and REITs.  And it really doesn't seem to match up with how the Euro works.

Well, the Euro certainly isn't fiat. Euro countries can run out of Euros. Those countries are currency users, not currency issuers.

Japan is fiat, but they are simply purchasing those assets in an attempt to manipulate their economy. They don't need to purchase those assets up to have a fiat currency, but they have the freedom to do so if they wish. In other words, the assets that the BOJ purchases aren't backing their currency. They are just strategic purchases to manipulate the economy.

As for the United States, The Fed's balance sheet is 55% Treasury debt.  The Fed printed money out of thin air for the other 45% as well.  If I understand correctly, MMT doesn't consider that other 45% of the balance sheet to be the product of true "fiat currency".  Does this mean that MMT considers us to be 55% fiat and 45% asset-based?

No. We have a fiat currency. Having a fiat currency doesn't prevent a Central Bank from buying a car. All we're saying is that the Central Bank doesn't need to buy a car to keep the currency working.

If MMT requires the central bank to exclusively purchase government debt in order to offer a meaningful model, just say so.

It doesn't require it exclusively. But, if the government is fiat, that's exactly what happens.

I see.  If this is the case, I'm struggling to come up with an example of a modern currency that fits MMT's definition of "fiat" then.  We've established (I think) that the balance sheets of the United States and the Bank of Japan don't match up.  And correct me if I'm wrong, but I get the impression that you view the ECB as being more of a gold standard in drag than managers of a fiat currency.  So what is a good example of a country that fits MMT's description of a fiat currency?

It's simple. If a country doesn't owe any foreign-denominated debt, has a free-floating exchange rate (i.e. no convertibility requirements, no pegs, etc.), and is the sole issuer of that currency... then it's a fiat government.

Just because a country holds some assets doesn't nullify those requirements or somehow makes it less fiat. It just means that the country doesn't need to own those assets because there isn't any specific convertibility to anything. And if a country doesn't need to own those assets, then it can fully fund itself using imaginary paper.

Nobody would ever suggest that a fiat government isn't allowed to buy an asset or lots of assets. You're just assuming that buying assets actually backs something, when it doesn't.

LW, I think you are so close to figuring out how a fiat currency works. You just need to stop thinking about fiat currencies as being backed by anything. Well done!

Let's see whether we can converge on what it means for a currency to be "backed by" an asset.

We routinely buy and sell Treasuries to expand and contract the money supply.  These bonds come with a promise to pay interest and ultimately return the lender's principal at a later date.  The issuer of these bonds (the US government) will pay you back either with newly-borrowed money or with taxes confiscated from another citizen.

No, the taxes are inconsequential to funding a fiat government. You just need to forget the premise that the taxes fund anything. By definition, a fiat government can't be funded by the taxes it collects (since the money is really just numbers in a computer, or points on a scoreboard). If the currency isn't backed by anything, then the government bonds are no different than a savings certificate that's paid back with freshly printed money. If the currency were backed by something, and convertible to that something, then we would need to tax and spend accordingly.

If we look at something like the Bank of Japan's corporate bond purchases, the only difference I see is that the issuer (some corporations) will pay you back with newly-borrowed money or actual revenue they earn from selling goods and services.

Would you consider the currency to be backed by an asset in the first case, the second case, both cases, or neither case?

Japan's currency isn't backed by anything. That doesn't mean that the BOJ can't buy bonds if it wants to.

[moda0306]

LW,

A bond IS NOT a promise by the treasury to pull money out of the economy in some other way when they pay you back cash.  A bond is a promise to pay back cash, however they see fit.  It doesn't have to come from borrowing or taxation.

I think you are imagining treasury bonds as something fundamentally different than M0... some kind of promise to reduce the purchasing power of someone else when they expire, and in reality, especially in a balance-sheet recession, they are basically the same thing as M0... "purchasing power dreamt up by government and given value by taxation."

[Gumby]

LW,

A bond IS NOT a promise by the treasury to pull money out of the economy in some other way when they pay you back cash.  A bond is a promise to pay back cash, however they see fit.  It doesn't have to come from borrowing or taxation.

Exactly. A fiat government can (and does) pay its bonds with printed money. The Treasury literally credits bank accounts with a few taps of a keyboard — much like a scorekeeper changes the scoreboard at a football game. We just happen to have an unneeded stipulation that paying off bonds with printed money requires more bonds to be issued. It's unnecessary, and it seems to cause more confusion for our politicians and citizens than anything else.

[moda0306]

If all our government issued was bonds, not cash, but cash was simply paid out as interest... and we temporarily allowed bonds to serve as mediums of exchange, they would serve that purpose wonderfully.

In this world, if the same amount had been issued in cash, society would function almost idendically.

Gov't issued currency and gov't issued bonds are both purchasing power dreamt up by the state given value via taxation.  Any contracts built on top of that in the private sector are simply acknowledgements of the currency, with assumptions about inflation built into those contracts.  These don't have a net-affect on balance sheets, but allow the REAL economy to be more productive, leaving people with better overall balance sheets (unless, of course, they go into debt to buy a plasma TV instead of starting a business or getting a worth-while education).

[Lone Wolf]

Therefore, a fiat country doesn't need to have MBS or gold in its vaults to back its currency.

Sure, sounds right.  The Federal Reserve system doesn't need any particular type of asset, but does need some form of asset.  55% of the time that asset has been US debt but I don't see anything inherent in the system that says this percentage can't be much lower or even zero.  And even if the Fed balance sheet were composed of 100% US debt, it would seem that there's more than enough debt out there to tide the Fed over for a really, really long time.

In other words, I think that MMT is frequently used as a cudgel against the idea of ever having a balanced budget or shrinking government in any way.  With a balanced budget, we'd stand pat at $15 trillion in government debt.  The Federal Reserve has something like $1.6 trillion in government debt on its balance sheet.  To me, it does not stand to reason that the system requires us to keep growing and growing and growing the national debt lest the Fed somehow be unable to expand the money supply.  If they want to expand the money supply, it'll be easy to do so for a long, long, long time, even without having to be as creative as Japan (or even as creative as Bernanke!)

So why the imperative for big deficits?  It seems that even calls for slightly less staggeringly huge deficits are greeted with shouts of alarm.  The Fed is far from short on tools to grow or shrink its balance sheet.

Nobody would ever suggest that a fiat government isn't allowed to buy an asset or lots of assets. You're just assuming that buying assets actually backs something, when it doesn't.

No, I agree that fiat currencies are not backed by anything.  The asset purchases are merely used to construct a balance sheet.  All I mean is that I see nothing inherently "special" about government debt as an asset purchase versus, say, buying the total bond market, gold, what-have-you.  They're all simply assets that behave in a certain manner.

When the Bank of Japan bought Japanese government bonds, it wasn't the Japanese government "spending money into existence".  It was the BoJ that created money.  Otherwise, it seems you'd have to say that when the BoJ purchased a corporate bond, the bond issuer "spent money into existence" as well.

[Lone Wolf]

A bond IS NOT a promise by the treasury to pull money out of the economy in some other way when they pay you back cash.  A bond is a promise to pay back cash, however they see fit.  It doesn't have to come from borrowing or taxation.

In our system as it exists today, the Central Bank (not the Treasury) has sole access to the printing press.  So as a bond goes through its life, the Treasury must pay it back with money it confiscates via taxes or money that it has borrowed.  It may borrow this money from the Fed, but that doesn't change its array of options.  In today's system, it must tax or borrow.

As for the Fed, it may only print money by acquiring an asset.  That asset may be a Treasury bond, it may be some gold, a corporate bond, or it may be some kind of vile MBS.

I think that MMT looks at politicians having direct access to the printing press as the ideal arrangement.  I happen to find the idea abhorrent.  But neither opinion really matters much -- the operational reality is that today only the Fed can print and we have an ostensibly independent central bank.  MMT seems to me to be describing something else.

[moda0306]

LW,

If the fed has to suck up a financial asset to issue one, it hasn't increased the net financial assets (aka, money) of society.

The fact that the fed MUST suck up those assets means they're just moving pieces around, and NOT increasing anyone's purchasing power (unless they pay $100 per $60 worth of MBS).  If nobody feels like they have increased purchasing power, your savings haven't been debased.  People can't buy more with the same amount in net financial assets, so the "helecopter drop" hasn't occurred.  Inflation won't result because peoples' balance sheets haven't changed much at all.

When the treasury spends, however, the trade 1 unit of bond for 1 unit of cash, then they spend one unit of cash... this is coordinated with the fed to make sure they ALWAYS have that 1 unit of cash.

Both the fiat bond and the fiat cash have 1 unit of purchasing power that the holder of each will realize.  Therefore, THIS is what truly moves financial asset balances on the balance-sheets of Americans, and can drive inflation.  This is why $1 Trillion of additional stimulus today ($5k per adult about??) would cause much more recovery/inflation (I won't get into the argument of which quite yet, but I think we both know my position) than any purchasing of financial assets, even if it's MBS's, stocks & gold.

There are MMT articles that go into detail about the operational reality of the fed & treasury, and 1) they seem to know a HECK of a lot about the waltz that Geitner and Bernanke dance, and 2) it's obvious that they work hand in hand to allow the treasury to spend money... The Bernanke doesn't say "well, we don't like this healthcare bill so you're on your own."

[moda0306]

LW,

I'd add that you should go through one more mental exercise.

Imagine you look into your portfolio one day, and realize that $5,000 of your ST treasury bonds (that were earning .11%) have been converted to cash... how would you feel?  Would you feel the urge to go out and spend it, or just be annoyed with your broker's incompetence?  Do you feel like your neighbor's purchasing power has been debased by what's happened?  Is there any real reason to go out and spend money any differently?

Now, imagine answering all those same questions if you found another $5,000 cash or ST treasuries in your account.

Wouldn't you feel a lot more emotion towards the $5k that showed up out of nowhere?... maybe even willing to go out and spend some money?

That "feeling" is your balance sheet improving to the point where you're willing to spend when you wouldn't have before.  This can cause inflation.  This is a problem if we're at full capacity, but results in increased real wealth in the economy if we're not at full capacity, as now people are making widgets instead of sitting at home unemployed, losing skills.
I think the "operational reality" you are thinking you see of the fed and treasury is just a mirage that's an artifact of the gold standard, and The Bernanke and Geithner completely pierce that with the reality of their arrangement.

Gumby, can you find a good article on MMT's take on how the fed & treasury interact?  I think LW would see that the "operational reality" he's interpreting is a false one.

[moda0306]

LW,

Lastly, I'd add that on the more conservative end MMT'ers are MUCH more for tax cuts that broad spending increases that either aren't good investments or try to get too much done too soon (shovel-ready projects that really aren't).

It'd be easy to see MMT as hyper-Keynesianism, but it's really not... It's opinions on bail-outs are decidedly Austrian.  It's often as much about lowering taxes as it is about increasing spending.  They are mad at BOTH sides for making the issue deficits.

Despite all our debates, at least for the next few years, I'd say we probably wouldn't disagree too much on what an appropriate tax rate would be. 

[Lone Wolf]

When the treasury spends, however, the trade 1 unit of bond for 1 unit of cash, then they spend one unit of cash... this is coordinated with the fed to make sure they ALWAYS have that 1 unit of cash.
...
There are MMT articles that go into detail about the operational reality of the fed & treasury, and 1) they seem to know a HECK of a lot about the waltz that Geitner and Bernanke dance, and 2) it's obvious that they work hand in hand to allow the treasury to spend money... The Bernanke doesn't say "well, we don't like this healthcare bill so you're on your own."

Treasury auctions are set up "not to fail" due to the way that primary dealers are, er, "motivated" to participate.  But the Fed isn't obligated to forever and ever expand its balance sheet with Treasuries as spending climbs to ever more dizzying heights.  The Fed's mandate is to control inflation and control unemployment.  (Which is already too difficult of a dual mandate IMO.)

As the Dallas Fed's Richard Fisher put it: "The challenge for the Federal Reserve is to provide needed near-term monetary stimulus while maintaining a credible commitment to long-term price stability. This means (a) distinctly avoiding any perception that we are willing to monetize this or any other administration’s fiscal initiatives, and (b) providing the marketplace with a clear sense of how we will unwind in a timely manner the stop-gap measures that have resulted in a dramatic expansion of our balance sheet."

If you think Fisher's fibbing... well, that's okay.  I won't tell you that you're wrong.  But does this mean that yet another assumption upon which MMT rests is that we must not have an independent central bank?  Because we are supposed to have an independent central bank... and MMT appears to break down if the Fed isn't acting as "handmaiden to the Treasury".

That "feeling" is your balance sheet improving to the point where you're willing to spend when you wouldn't have before.  This can cause inflation.  This is a problem if we're at full capacity, but results in increased real wealth in the economy if we're not at full capacity, as now people are making widgets instead of sitting at home unemployed, losing skills.

Sure to be an interesting discussion, but perhaps another time.  Focusing in on nuts and bolts seems most useful right now.

[Gumby]

Therefore, a fiat country doesn't need to have MBS or gold in its vaults to back its currency.

Sure, sounds right.  The Federal Reserve system doesn't need any particular type of asset, but does need some form of asset.

The Fed doesn't need to hold anything beyond government confetti. That's all we're saying. That's what a fiat currency is.... nothing.

55% of the time that asset has been US debt but I don't see anything inherent in the system that says this percentage can't be much lower or even zero.

But then you wouldn't be talking about a fiat currency anymore. You'd be talking about an asset-backed currency. We are going in circles.

And even if the Fed balance sheet were composed of 100% US debt, it would seem that there's more than enough debt out there to tide the Fed over for a really, really long time.

You're missing the point entirely. The Fed doesn't even need to exist in a fiat government. The Fed is only useful for meddling with the free market. I find it odd that you are actually a fan of the Fed and the interference it causes.

In other words, I think that MMT is frequently used as a cudgel against the idea of ever having a balanced budget or shrinking government in any way.

Many MMTers want a smaller government and a free market. With your example you would have a Fed that meddles with the free market.

Furthermore, there is no point for a fiat government to have a balanced budget. By definition, a fiat government is no richer or poorer for saving or spending money. It makes no difference.

Nobody would ever suggest that a fiat government isn't allowed to buy an asset or lots of assets. You're just assuming that buying assets actually backs something, when it doesn't.

No, I agree that fiat currencies are not backed by anything.  The asset purchases are merely used to construct a balance sheet.  All I mean is that I see nothing inherently "special" about government debt as an asset purchase versus, say, buying the total bond market, gold, what-have-you.  They're all simply assets that behave in a certain manner.

You are suggesting having the Fed interfering in the free market — by buying up assets — as a way to reduce meaningless deficits. Deficits are meaningless in a fiat government. A fiat government cannot meaningfully save or borrow. Bonds haven't funded anything since 1971.

When the Bank of Japan bought Japanese government bonds, it wasn't the Japanese government "spending money into existence".  It was the BoJ that created money.  Otherwise, it seems you'd have to say that when the BoJ purchased a corporate bond, the bond issuer "spent money into existence" as well.

The Japanese government created the government bond out of thin air. The Japanese corporation simply swapped assets with the government.

LW, you're still having difficulty understanding the difference between the private sector and the public sector and how they affect net financial assets. You'll need to learn about why they are different before we can continue this conversation. Let us know now we can help you understand that. We're here to help!

[Gumby]

Gumby, can you find a good article on MMT's take on how the fed & treasury interact?  I think LW would see that the "operational reality" he's interpreting is a false one.

Here you go... Mandatory reading:

The N.Y. Fed Explains How The Government Spends First and Issues Bonds Later

Once again... The funds to pay taxes and buy government securities come from government spending.

[Lone Wolf]

You're missing the point entirely. The Fed doesn't even need to exist in a fiat government. The Fed is only useful for meddling with the free market. I find it odd that you are actually a fan of the Fed and the interference it causes.

Ha!  You're certainly the first to call me a "fan" of the system.  I'm just talking through how it actually works.  When you ascribe motivations to me (especially strange ones like cheerleading for the Fed), you're likely missing my point.  I'm looking at this as a nuts and bolts conversation.

If you call me a fan of the Fed again, I will be forced to tell everyone that you have "Bieber Fever".  Please do not make me do this.

The Japanese government created the government bond out of thin air. The Japanese corporation simply swapped assets with the government.

In case 1, the Japanese government issued a promise to pay.  The Central Bank ultimately purchased this promise.

In case 2, a Japanese corporation issued a promise to pay.  The Central Bank ultimately purchased this promise.

I'm looking for an explanation for how one of these is assets being created out of thin air and the other is not.

[moda0306]

LW,

There are notoriously "Austrian" members of the fed... I think you'd find others that disagree with that man's statement.  Even Peter Schiff, a very smart man and great predictor of the housing bubble, seems to be horribly wrong on deficits and inflation.

I guess the best way to say it is while the Treasury prints net financial assets, without the fed there to play ball, there would be a need to issue debt or collect taxes... so it's not that the fed isn't a necessary piece of the dance that is "printing money," but just that their actions are secondary to the treasury's actions of expanding the balance of net financial assets in the economy.  I think we're drilling into what we need to... as our issues seem to be what exactly the feds relationship with the treasury truly is... so at least we're getting somewhere.

Also, I think part of the "nuts and bolts" of modern money is fully absorbing what it is... because using our preconceived notions about debt and money in our households and businesses is something hard to kick out of our brain.  I mean, look at how many discussions we've had to have about what is fundamentally taking place in the world of paper "assets," and we still don't agree on fundamental truths, partially because of what the process truly entails by the fed & treasury, and partially because of our brain's inability to comprehend things like a fiat currency backed by the threat of taxation/force.  It involves sitting and pontificating to a degree I never thought money would force me to do.  As much as MMT articles and descriptions of our currency have helped, me sitting around giving myself little "tests" has helped just as much to fill in the gaps.  Your perspective, by the way, has also helped.  I hope Gumby and I constantly teaming up against you doesn't discourage you.

[moda0306]

In case 1, the Japanese government issued a promise to pay.  The Central Bank ultimately purchased this promise.

In case 2, a Japanese corporation issued a promise to pay.  The Central Bank ultimately purchased this promise.

I'm looking for an explanation for how one of these is assets being created out of thin air and the other is not.

LW,

As opposed to gold, widgets, etc, the value of the corporate bond is based on the value of the currency its denominated in.  Its mere existence is an asset/liability contractual offset which nas no net value, and the size of the +/- side of that offset is dependent on the value of the currency in the eyes of the public.  So while the "asset" may seem to be "real" (as opposed to the gov't bond), it's still based on the same construct of fiat paper wealth.

People give gov't money value because money pays the taxes that keep us out of jail.

People give gov't bonds value because money pays the taxes that keep us out of jail.

People give corporate bonds value because money pays the taxes that keep us out of jail.

Paper bonds denomonated in dollars are never REAL assets... but acknowledgment of future ability of the US gov't to keep the currency from being horribly debased AND the ability for the corp to offer goods/services to pull some of that money out of the real economy.  Does that all help?

Removing paper assets from the economy with other paper assets, when both are given value for the same fiat reason, will have little affect on the real economy.

[stone]

http://bilbo.economicoutlook.net/blog/?p=11218
Is the MMT opinion about central banking. As Lone Wolf says, they do not want an independent central bank.

[Gumby]

In our system as it exists today, the Central Bank (not the Treasury) has sole access to the printing press.

Nope. We've already shown above that the Fed can't increase net financial assets in the private sector. When Congress decides to build an air craft carrier, it just does it. It doesn't ask the Fed for permission. It doesn't call up China and ask them to buy Treasuries. It just spends the money and issues the bonds later. And building the air craft carrier increases the net financial assets in the private sector.

The Fed doesn't even have the authority to do a helicopter drop on its own without taking assets away from the private sector. Nobel Prize-winning economist, Paul Krugman, explains:

The Fed is empowered to buy assets, which is what it does in an open-market operation, but not just to give stuff away. So to do the equivalent of a helicopter drop, the Fed would have to work with the Treasury: it would have to buy government debt, and the Treasury would then hand out the money. But the Treasury can’t do this without enabling legislation.

Source: http://krugman.blogs.nytimes.com/2010/0 ... -question/

That's how it works. In other words, the Fed can't print away money without  interfering with the free market and buying up assets.

So as a bond goes through its life, the Treasury must pay it back with money it confiscates via taxes or money that it has borrowed.  It may borrow this money from the Fed, but that doesn't change its array of options.  In today's system, it must tax or borrow.

Nope. In your model the government starts bankrupt and it's impossible to create any money without the Fed buying stuff and interfering with the free market. But, if that were true, then we'd be on a gold standard (or some other asset-based standard).

As for the Fed, it may only print money by acquiring an asset.  That asset may be a Treasury bond, it may be some gold, a corporate bond, or it may be some kind of vile MBS.

Right. We're talking about fiat currency here. So, the Fed shouldn't really be buying up any real assets beyond those that help it direct Open Market operations. That's it's entire job.

I think that MMT looks at politicians having direct access to the printing press as the ideal arrangement.  I happen to find the idea abhorrent.

Which is odd because you'd somehow prefer the Fed interfering with the Free Market. And if you're talking about the Fed buying Gold, then we're not talking about fiat money anymore.

You don't have to like fiat money to understand it. We're not trying to convince you that fiat money is necessarily better (that's another conversation). We're only trying to get you to understand how fiat money operates (no deficits, only printing, etc).

But neither opinion really matters much -- the operational reality is that today only the Fed can print and we have an ostensibly independent central bank.  MMT seems to me to be describing something else.

Sorry, but that's wrong. The Fed can't print without taking something else away. That's not how a fiat currency operates. You're not thinking this through. What kind of fiat currency would require a mandate of taking assets out of the private sector?? You're describing a gold standard.

[stone]

Imagine we are on a desert island and have one hundred USD in dollar bills. Lone Wolf could say that he was a corporation and issue bonds in return for dollar bills that he could then spend. So long as we without fail bought any bonds Lone Wolf issued and he promptly spent the dollars buying stuff off us (fish coconuts etc), he could forever have plenty of dollars to spend. As the interest payments mounted (because he had by then decades later issued $1000000 of outstanding debt that needed to be rolled over) he would need to issue bonds faster and faster.

Does it matter that he was a corporation not a government? Isn't it just a question of whether infinite debt is OK for one and not the other?

[moda0306]

It seems to me we have two entities:

One entity (the fed) has the power to put money in someone's account only if they get a financial asset (usually a treasury bond) in return.  It makes sense that this entity usually deal in treasury bonds, because that leaves it out of the private bond sector.

The other entity (treasury) has the authority to put money into someone's account without requiring anything in return.  We could call this "stimulus."  This entity also has the authority to purchase real goods and services with that money.

Which entity sounds like it has the most control over the paper purchasing power of the country?  Which entity seems like it can really debase the savings of Americans?  Which entity are you really scared of to maybe create inflation?  If you, as an individual, could either be "quantitatively eased" (assuming any bond purchase qualifies as QE) of your bonds or "stimulated" by increased dollars in your account, which would have the greatest affect on your attitude towards consumption?  

Important: More importantly, if everyone in the United States but you were to be "quantitatively eased" vs "stimulated," which one would you feel more cheated by?  Which one would debase your savings more?  Which would leave you paying more for gas and milk?

Even if the fed was buying corporate bonds with cash, I would feel MUCH more cheated if everybody but me got $5,000 in stimulus than if everybody but me had $5,000 of their corporate/treasury/whatever bonds turned into cash.

[Gumby]

You're missing the point entirely. The Fed doesn't even need to exist in a fiat government. The Fed is only useful for meddling with the free market. I find it odd that you are actually a fan of the Fed and the interference it causes.

Ha!  You're certainly the first to call me a "fan" of the system.  I'm just talking through how it actually works.  When you ascribe motivations to me (especially strange ones like cheerleading for the Fed), you're likely missing my point.  I'm looking at this as a nuts and bolts conversation.

If you call me a fan of the Fed again, I will be forced to tell everyone that you have "Bieber Fever".  Please do not make me do this.

It's a very common misconception that the Fed has a fiat printing press. But, how can it have a fiat-style printing press if it has to take real assets out of the private sector? As Krugman explains, only the Treasury can initiate the helicopter drop, with enabling legislation.

The Japanese government created the government bond out of thin air. The Japanese corporation simply swapped assets with the government.

In case 1, the Japanese government issued a promise to pay.  The Central Bank ultimately purchased this promise.

In case 2, a Japanese corporation issued a promise to pay.  The Central Bank ultimately purchased this promise.

I'm looking for an explanation for how one of these is assets being created out of thin air and the other is not.

Because the private sector is taking on a liability when the corporation issues a bond.

When the fiat government issues a bond, there is no liability for the private sector. It's actually a net financial gain for the private sector.

As Thomas Edison explains:

If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good...It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either

Thomas Edison, quoted in NY Times, Dec. 6, 1921

[Gumby]

Imagine we are on a desert island and have one hundred USD in dollar bills. Lone Wolf could say that he was a corporation and issue bonds in return for dollar bills that he could then spend. So long as we without fail bought any bonds Lone Wolf issued and he promptly spent the dollars buying stuff off us (fish coconuts etc), he could forever have plenty of dollars to spend. As the interest payments mounted (because he had by then decades later issued $1000000 of outstanding debt that needed to be rolled over) he would need to issue bonds faster and faster.

Does it matter that he was a corporation not a government? Isn't it just a question of whether infinite debt is OK for one and not the other?

Unless he was pointing a gun to our heads, and demanding that we pay him back in those bonds, I fail to see why we would care about his bonds in the first place. They wouldn't have much value on the open market since nobody else would feel the need to have them. At least dollars allow you to pay your taxes.

[stone]

moda, the treasury has to issue bonds whenever they spend. They are like Lone Wolf in my desert island example. Lone Wolf could have started off with not a cent. Gumby, you and me could have had one hundred dollars between us. We wanted to get rich and Lone Wolf obliged by issuing 4% bonds as fast as we would buy them. He always immediately spent the money buying fish and coconuts from us and just sat there all day writing out bonds and eating whilst we fished and gathered coconuts to sell to him in return for money to spend on bonds. After ten years of frenetic fishing we would have massive bond portfolios and Lone Wolf would be obese.

[Gumby]

After ten years of frenetic fishing we would have massive bond portfolios and Lone Wolf would be obese.

But who would want those bonds? They would be worthless to others if Lone Wolf wasn't demanding them returned as tax payments.