Do I owe this woman an apology?

[moda0306]

stone,

Aren't these bond-issuances coordinated with the fed to make sure that there is never an issue?  Isn't it just a formality?

Like "you have to fill out this paper-work to get hospital care"... well if you're hemmoraging, they're not going to make you fill out your insurance information.

Lastly, the treasury bond is another financial asset that gives the holder purchasing power on their balance sheet (even if they don't physically take it to the grocery store).

Purchasing power on your balance sheet, not whether it's in the form of cash or treasury bonds, is what truly affects what people will choose to consume.

For instance, if you woke up tomorrow and found $1 Billion in your Treasury Direct account in 1 year treasuries, would you say to yourself, "Man, that's great... I'd go buy a Ferrari right now, but this is all in treasury bonds so I can't spend it... guess I'll have to wait."??  Treasury bonds are purchasing power in almost the same way cash is.

[stone]

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.

I'm imagining that it is only us four on the desert island. You me and moda want to get a nice fat return from our $100 that we brought to the island.

At the moment I can't use my TR60 4% UK treasuries to buy anything with. They are simply a bond. Same thing with the bonds Lone Wolf issues. I agree the desert island context makes us look dim and Lone Wolf look canny but it is exactly what we are doing in real life isn't it?

[moda0306]

Do we think we'll be on the island forever?

Why would we value paper if somebody with a gun isn't trying to tax us?

[stone]

Moda, you me and Gumby could lend each other money using Lone Wolf bonds as collateral.

[moda0306]

AGGGHHGHHGHGHHH!!!!

Why do we CARE about any paper??!!

In the US the only reason we value paper is because of taxes and the IRS... WHY do we care about paper on a desert island?  Is some of it convertable for coconuts?

Sorry, stone... I'm just not getting through to you here.

[Lone Wolf]

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.

How does this invalidate the "operational reality" as I laid it out before?  Specifically, my assertion that the Fed is under no obligation to buy up as much debt as Congress and the Treasury might wish.  If I've missed some bit that contradicts that, please point it out to me.

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.

Do you think it is fair to say that MMT assumes or even depends on the idea that the Central Bank is not independent?

Because it sounds like we agree.  If the the Central Bank can be commanded to purchase and hold Treasuries, then Congress can direct the "printing of money".  If the Bank cannot be so commanded, then Congress is not directly in charge of "printing money".

[stone]

We might value the USD as a medium of exchange for convenience I guess. I personally agree that taxation is an important backstop for currency. I'm just trying to get to the bottom of what the key difference is between "net financial assets" and private debt. I'm not sure that it isn't simply that we don't trust any non-government entity to last forever and so keep the debt whole.

[moda0306]

LW,

We might be close now... I'm not 100% sure on exactly what the fed is "obligated to do."  Given the descriptions I've read, though, (see below) it sure seems like Tim & Ben have each other on speed dial.

I guess they could be lying about everything, but it sure sounds pretty convincing.

“Staff on the Desk start each workday by gathering information about the market’s activities from a number of sources. The Fed’s traders discuss with the primary dealers how the day might unfold in the securities market and how the dealers’ task of financing their securities positions is progressing. Desk staff also talk with the large banks about their reserve needs and the banks’ plans for meeting them and with fed funds brokers about activities in that market.

Reserve forecasters at the New York Fed and at the Board of Governors in Washington, D.C., compile data on bank reserves for the previous day and make projections of factors that could affect reserves for future days. The staff also receives information from the Treasury about its balance at the Federal Reserve and assists the Treasury in managing this balance and Treasury accounts at commercial banks.

Following the discussion with the Treasury, forecasts of reserves are completed. Then, after reviewing all of the information gathered from the various sources, Desk staff develop a plan of action for the day.”?

So let’s connect the dots here. Treasury auctions bills, notes and bonds to “finance”? its spending. It announces these auctions periodically. In the case of bills it announces the auction each week on Monday and the bills are auctioned that Tuesday. This is due to a Congressional mandate because our politicians believe we must finance all of our spending via bond auctions – a myth that has persisted since moving off the gold standard.

What’s important to note here, however, is that Treasury and the Fed are working in partnership to track deposits and maintain a record of reserves in the system (Fed and Treasury are essentially the same entity as far as operations are concerned). William McChesney Margin, the longest serving Chairman of the Fed has actually said as much:

“There was a very real point . . .that the primary direction must come from the Treasury and that anything done by the Federal Reserve must be coordinated with the Treasury.“

The whole myth of “Fed independence”? generates a great deal of confusion. Make no mistake, the Fed is not an independent entity. They pass close to 100% of their profits onto the the US Treasury and work in close coordination with the government in everything they do. In addition, it’s important to note that the Fed is an act of Congress. The citizens of the USA own the Federal Reserve. NOT the banks. If we wanted to impose our will over the Federal Reserve we very well could. The myth of independence is intended to create the perception of no political bias. They might maintain some political independence, but the Fed is very much a part of the US government.

This coordination is important because their reserve tracking and auction operations are actually just a monetary tool and NOT a fiscal financing tool. When the Treasury auctions off bonds it does so only after discussing matters with the Fed’s reserve forecasters. In essence, the government is soaking up reserves that had already been spent into existence in order to target the overnight rate. It can be no other way. Without Treasury having first spent the money into existence there is no money with which the Primary Dealers can “fund”? the deficit.

http://pragcap.com/resources/understand ... ary-system

[moda0306]

Simply put, if the fed is trying to manage interest rates, but it allows a treasury auction to fail, rates will explode and it will have failed at its goal.

I'm sure, though, if you put Ron Paul in as Fed Chairman, maybe we would see your scenario unfold.

I think MMT assumes that the fed isn't going to let an auction fail, though, and allow interest-rates to skyrocket during a recession.

[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.

How does this invalidate the "operational reality" as I laid it out before?  Specifically, my assertion that the Fed is under no obligation to buy up as much debt as Congress and the Treasury might wish.  If I've missed some bit that contradicts that, please point it out to me.

You seem to believe that the Fed owns the fiat printing press. It doesn't. The article (which is citing the NY Fed as its source) shows us that the Treasury is the source of the fiat printing press to fund the Treasury auctions. The Treasury spends the money into existence first, and issues the corresponding bonds later. That is a key point here.

In other words, the Fed is telling us that money that is needed to buy the bonds in the first place was spent into existence by the Treasury.

In your model, as you've explained it, you believe that the Fed is the source of all money to buy up government bonds. That's not how it works. The Fed is only empowered to make swaps.

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.

Do you think it is fair to say that MMT assumes or even depends on the idea that the Central Bank is not independent?

Because it sounds like we agree.  If the the Central Bank can be commanded to purchase and hold Treasuries, then Congress can direct the "printing of money".  If the Bank cannot be so commanded, then Congress is not directly in charge of "printing money".

You can be sure that Congress is in charge of directing the printing of money. Every dollar the Treasury spends creates new assets in the private sector. The Fed is only empowered to make swaps, not hand out money with no strings attached.

[stone]

Also private debt has some limit based on asset values used as collateral etc. If we don't ask any such requirement of a government then perhaps that is what confers the "net financial asset" status on government debt. I must admit it does seem to depend on either having QE (with an ever expanding Fed balance sheet and an aquiescent Fed) or having real interest rates less than growth in the tax income.

[moda0306]

Gumby,

We've got him in our sights.... steady.... steady....


LW,

JK.

[moda0306]

More from the same article:

This doesn’t mean auctions can’t fail. They can. But quite honestly, it wouldn’t matter all that much as the reserve drain would simply take place at a later date. The auctions are designed to succeed because they are merely targeting reserves that they KNOW are in the system. There is no red phone at Treasury that Tim Geithner uses to call China before it spends money. No red phone to Japan. There is only a phone to the Fed where reserve forecasters communicate with the Treasury and the Primary Dealers to determine the size of the necessary auctions. If the Fed were to find that there were not enough reserves in the system to settle the bond auctions, as the monopoly supplier of reserves, they would make them available. Thus, when auctions are completed the reserve drain is accomplished, Congress thinks we have “funded”? our spending and we can all go along our merry way.

Most importantly though, these actions help the Fed to control its overnight target rate. Before the Fed began paying interest on reserves the lack of auctions would have resulted in excess reserves in the banking system and a loss of control of the overnight rate as banks bid down the rate in an effort to lend their excess reserves. This would drive the rate to 0%. Now, with the Fed paying interest on reserves, the Fed is able to maintain excess reserves in the banking system by establishing a floor at the rate of interest it pays.

So you can see that this is all well orchestrated monetary policy. It is not a fiscal financing operation. The Fed and Treasury are working in tandem with the Primary Dealers to track reserves. After all, part of the agreement in becoming a Primary Dealer is to make a market in treasuries:

“The primary dealers serve, first and foremost, as trading counterparties of the Federal Reserve Bank of New York (The New York Fed) in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently as counterparty to the New York Fed in its execution of open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed’s trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.”?

[Gumby]

We've got him in our sights.... steady.... steady....


LW,

JK.

I have to admit that I am thoroughly impressed with LW's effort. He is very close to seeing it. The operational realities explained by the NY Fed are key.

It's also worth pointing out the obvious, which is that our nation has well over $15 Trillion in risk free assets in the private sector — that counts as all of our savings (which represent our hard-earned ingenuity and creativity). It's fairly obvious that the Fed did not create those assets — particularly since the Fed can only conduct swaps.

[moda0306]

I have to admit that I am thoroughly impressed with LW's effort. He is very close to seeing it. The operational realities explained by the NY Fed are key.

I think this is the MMT thread to end all MMT threads... funny how they pop out of nowhere all over the place.  I'm glad Craig doesn't nip stuff like this in the bud for fear of political arguments.  I feel like the opposite of when I was told Santa Claus wasn't real.

Even if there is no real "relationship," if I were given the keys to the Fed and charged with economic/monetary stability, the last thing I'd do is let an auction fail or let the treasury go "bankrupt." 

The fact that the fed has no input on policy, but is charged with stability nonetheless, almost by definition makes them a puppet (if you will) of the treasury, lest they fail at their main mission when our financial system collapses.

[Gumby]

I think this is the MMT thread to end all MMT threads...

I think it's important that LW know that he doesn't have to like fiat money once he realizes how it all works.

The fact that the fed has no input on policy, but is charged with stability nonetheless, almost by definition makes them a puppet (if you will) of the treasury, lest they fail at their main mission when our financial system collapses.

It's also important to realize that the Treasury Secretary has the legal authority to force the Fed to do certain things. It's not like the Fed has free reign to do whatever it wants to. Bernanke has to obey the Treasury when push comes to shove. I'll have to dig that reference up when I get a chance.

[Gumby]

I found it!!!!!!

FEDERAL RESERVE ACT

Section 10

6. Reservation of Powers of Secretary of Treasury

Nothing in this Act contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.

Source: http://www.federalreserve.gov/aboutthef ... n%2010.htm

[moda0306]

Gumby,

Should we try to petition for a MMT chapter to make its way into the PP book?  IMO it really helps solidify the arguments for holding treasury bonds during massive QE, and even during high deficit spending.

An acknowledgement of MMT (functionality... not morality) by a libertarian would sure go a long way to giving it legitimacy.

Methinks if Craig & MT had waited one more year to write it, they'd have a more solid grasp on MMT and would have included some easy-to-digest pieces from their work.

[moda0306]

I found it!!!!!!

FEDERAL RESERVE ACT

Section 10

6. Reservation of Powers of Secretary of Treasury

Nothing in this Act contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.

Source: http://www.federalreserve.gov/aboutthef ... n%2010.htm

Holy shit, Gumby... this is epic.  Mind: blown.

[Gumby]

Should we try to petition for a MMT chapter to make its way into the PP book?  IMO it really helps solidify the arguments for holding treasury bonds during massive QE, and even during high deficit spending.

It definitely helps with understanding why Treasuries are virtually risk free. But, I don't think it's a great idea. The book would have to be another book altogether. It takes a few months for people to be able to digest MMT. It's like a PP all in itself.

Holy shit, Gumby... this is epic.  Mind: blown.

Yep... The Fed must obey the Treasury Secretary whenever he wants them to.

[moda0306]

I'm almost laughing at how clear all the pieces are becoming.  It truly needs to be "absorbed," not simply read or taught.  Even if you don't agree with it, it still gives you the tools to invest in treasury bonds as half your portfolio and still sleep at night.

A year ago I constantly asked myself "What gives our currency value... what compels us to say to ourselves 'This $10 is sufficient payment for my old TV I'm selling on Craigslist."  It wasn't sufficient for me to simply accept that "it has value because others give it value."  That seemed way too unstable (thinking Beany Babies or baseball cards).  I couldn't put my finger on it but I knew that couldn't be the whole story.

MMT gave me that answer.  If I ever have kids I'm going to rule over them with currency I make at home, tax every week, and distribute for services and/or for nothing at all... just to enjoy the process and see what they do with it.  Don't want to pay tax?  Time out in your room with no electronic devices... just a copy of "The 6 Innocent Frauds."

[Lone Wolf]

The Fed doesn't even have the authority to do a helicopter drop on its own without taking assets away from the private sector.

The Fed has a printing press in that it can purchase assets by creating currency out of thin air.  If the government issues $1 trillion in new helicopter drop bonds on the open market, and I purchase them with counterfeit money, then I am the one with a printing press.

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).

I'm just pointing out that the government funds itself by issuing bonds first.  The Fed may or may not create money "out of thin air" in order to purchase those bonds, but Congress can't print money out of thin air on its own.

Therefore, the Treasury is issuing an asset (such as a T-bill) that a PP adherent, the Chinese or a pension fund might choose to buy.  The Fed prints money if it wishes to claim this asset.

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.

Treasury Bonds are "real assets", aren't they?  They are promises to pay dollars.  The Fed might help the Treasury deliver on these obligations or it might not.  But the Fed and Treasury are not a single entity.

Corporate bonds and mortgage-backed securities are also promises to pay dollars (and also assets, similar to T-bills.)  They're only as good as the perceived ability to pay (and the perceived ability for the currency to hold its value.)  But they are only a promise.

Sorry, but that's wrong. The Fed can't print without taking something else away.

Sure.  It can "take away" a mortgage-backed security or it can "take away" a Treasury security.  I understand that your argument is that the government can "deficit spend", but this is not a unique ability.  The homeowners represented by an MBS also "deficit spent".  In either case, the Fed "takes away" the promise to repay later and prints up real currency in its place.

So for our MBS issuer, they bought a house, spending $100,000 in the process.  Then the Fed purchased that security with money printed out of thin air.  That's the creation of new money.

[moda0306]

LW,

A promise to pay a fiat asset is a fiat asset.  These are not "real" assets... they are financial assets backed by the ability of our government to tax us.  You can't think of dollars as confetti but think of treasury bonds, or any other bond for that matter, as being a "real" asset.  It's promising to pay a fiat amount.  

If we were to go into hyperinflation, not just dollars would lose value... so would treasury bonds... so would corporate bonds... so would any other promise to pay dollars.

What wouldn't lose value?  Well, as long as there's a government to enforce it, a promise to fix your plumbing for value you've already given wouldn't.  It may be a financial asset (in a way) but it at least is giving you something of value.

[Lone Wolf]

You seem to believe that the Fed owns the fiat printing press. It doesn't. The article (which is citing the NY Fed as its source) shows us that the Treasury is the source of the fiat printing press to fund the Treasury auctions. The Treasury spends the money into existence first, and issues the corresponding bonds later. That is a key point here.

I read the article and I do not follow that line of reasoning.  Operationally, the author didn't seem to present any evidence to support this assertion.

Ultimately, I don't see how it matters.  In the end, $100 gets spent and a $100 bond gets issued.  Either someone buys it at auction or some primary dealer is forced to buy it.

Whether the Fed buys that bond with money printed out of thin air is an entirely separate issue.

Should we try to petition for a MMT chapter to make its way into the PP book?

Please no.  I can't think of anything more inappropriate to include in a book about the Permanent Portfolio than a fringe economic theory.

[Lone Wolf]

A promise to pay a fiat asset is a fiat asset.  These are not "real" assets... they are financial assets backed by the ability of our government to tax us.  You can't think of dollars as confetti but think of treasury bonds, or any other bond for that matter, as being a "real" asset.  It's promising to pay a fiat amount.  

It sounds like our definitions line up reasonably well then.

I imagine we also agree that the homeowner represented by an MBS is "deficit spending".  Likewise, the issuer of a corporate bond can "deficit spend".  And certainly, the issuer of a Treasury bond does loads of deficit spending.

Thus, when the Fed buys any of these assets, it is loaning funds with money printed out of thin air.  Whether the purchased financial asset was created in the "public sector" or the "private sector" makes no difference in terms of how money gets created.  Do you agree?