Do I owe this woman an apology?

[moda0306]

My 2 cents:

The private sector COULD exist without money at all... it'd be very, very limited in its productive capacity.  "Loans" were probably simply promises to provide services or products in the future for value today.

The private sector used gold as "high powered money" for centuries.  This had value in and of itself and had all the great traits of a medium of exchange.  Loans were a promise to repay gold in the future for value today.  People naturally attempted to save in gold due to its liquidity and the future productive capacity it could claim in the economy.

Once the government got into issuing fiat currency, it didn't increase the net wealth of the country, but increased our ability to more efficiently do business with each other.  People naturally attempt to save in dollars due to its liquidity and the future productive capacity it could claim in the economy.

Treasury "debt" is no more than a promise to repay cash, not to pull it from elsewhere in the economy... Therefore, since it's the monopoly issuer, the gov'ts "bonds" should simply be viewed as a slightly different form of "high-powered money".... one that's more conducive to saving vs spending.  But the will to save comes from the medium of exchange having value, not the fact that there are bonds out there to invest in.

[Gumby]

Governments have received loans from private banks in history. "High powered money" could have originated from credit creation by private banks couldn't it? All that "high powered money" means is that the debt on the other side of it is treasury debt

I believe high powered money is defined as:

The monetary base is highly liquid money that consists of coins, paper money (both as bank vault cash and as currency circulating in the public), and commercial banks' reserves with the central bank.
Source: http://en.wikipedia.org/wiki/Monetary_base

In other words, the government creates high-powered money.

Gumby, yes I do think the private sector can exist without high powered money. The state tally stick system was an adoption by the state of a private method of individuals making debts to each other and then trading those debt obligations with third parties. Afterall what is a state? It is just a collection of people. Any group of people can start up a money system built on credit if they so wish.

Right. And can you buy government bonds or pay taxes with tally sticks? No.

I think what you're getting at is that it's possible to have a society where people use tally sticks. But, if that society is collecting taxes in dollars, then the tally sticks aren't going to be adequate for the society to pay its taxes with.

In any case, I still don't understand what you're getting at. Yes, I'm sure you can build yourself a tally-stick society. But, the United States is going to auction $10 Trillion in debt in the near future and America will pay all of its taxes in April. There is no way that we are going to issue ~$13 Trillion in new credit to pay for those Treasury bonds and taxes. We would never be able to pay that ~$13 Trillion back. The high-powered money was already spent into existence and already exists as high-powered reserves that need to be drained.

[Gumby]

Stone, my guess is that you would enjoy reading an Austrian proposal for Denationalizing money — where "rather than re-instituting a government-mandated gold standard, a free market in money be allowed to develop, with issuers of money competing with each other to produce the best, most stable and healthy currency"

http://mises.org/books/denationalisation.pdf

Of course, once you do that, you're no longer talking about MMT — since MMT requires that a government be the sole issuer of the currency. So, when you suggest that high-powered money doesn't need to exist in a society, you're essentially suggesting that the government is no longer the sole-issuer of currency. In which case, that's not MMT.

[stone]

Gumby, tally sticks were the state money in England at one point (for centuries). People bought founding shares in the original Bank of England using tally sticks and those formed  capital stock of the bank.

I'm just saying that you COULD say that the treasury is going to sell a load of bonds and then use the proceeds to spend. Most of the broad money supply is not high powered money. I'm just not so sure that it is all so cut and dried.

Paper pound notes are issued by Scottish commercial banks. In Scotland, that is what they use for paper money. (I used them to buy French, Swiss and Italian currency in those countries when I used to live in Scotland 20 odd years ago):
http://en.wikipedia.org/wiki/Banknotes_ ... d_sterling
English banknotes (Bank of England)
    The majority of sterling notes are printed by the Bank of England. These are legal tender in England and Wales, and accepted throughout the UK.[15] However since 2005, cash machines in Jersey no longer dispense English notes. Bank of England notes are generally accepted in the Overseas Territories which are at parity with sterling. In Gibraltar, there are examples of pairs of automatic cash dispensers placed together, one stocked with English notes, the other with local ones.

Scottish banknotes
    These are the recognised currency in Scotland, but are not legal tender. They are always accepted by traders in Scotland, and often in other parts of the United Kingdom. However, some people outside Scotland are unfamiliar with the notes and they are sometimes refused.[16] Institutions such as clearing banks, building societies and the Post Office will readily accept Scottish bank notes. Branches of the Scottish note-issuing banks situated in England dispense Bank of England notes and may not dispense their own notes from those branches.[17] Modern Scottish banknotes are denominated in pounds sterling, and are exactly the same value as Bank of England notes; they should not be confused with the former Pound Scots, a separate currency which was abolished in 1707.

Northern Ireland banknotes
    Banknotes issued by Northern Ireland banks have the same legal status as Scottish banknotes in that they are promissory notes issued in pounds sterling and may be used for cash transactions anywhere in the United Kingdom. However, they are rarely seen outside Northern Ireland and in England and Wales, although they could be accepted by any store, are often not accepted without some explanation.[18] As with Scottish notes, clearing banks and building societies will accept them. Northern Ireland sterling banknotes should not be confused with the Irish pound (or Punt), the former currency of the Republic of Ireland, which was replaced by the euro in 1999.

[stone]

Gumby, Andrew Jackson bought up the entire US national debt and set up the free banking era (as I guess you know). Machine Ghost on here is an advocate of free banking. I think Tortoise is too. I'm a bit of a statist myself I guess. I'm really just trying to fathom how Lone Wolf and the non-MMT world see our current actual system. I'm not sure that the same set up can not be seen and understood from different viewpoints. A bit like those pictures where you can either see a dog or a duck in the same image.

[Gumby]

Gumby, tally sticks were the state money in England at one point (for centuries). People bought founding shares in the original Bank of England using tally sticks and those formed capital stock of the bank.

Tally sticks, gold, silver, wheat.... that's not MMT.

I'm just saying that you COULD say that the treasury is going to sell a load of bonds and then use the proceeds to spend. Most of the broad money supply is not high powered money. I'm just not so sure that it is all so cut and dried.

I'm sure that could happen. But, I doubt it ever does. And considering that banks aren't loaning much these days, I'm not sure that would work out to well — especially since people would have a hard time paying back their loans if they were using them to buy fresh Treasuries and pay taxes.

When you say "broader money supply" I hope you don't include close substitutes for money (i.e. money market funds, commercial paper, agency debt, etc.). The Treasury doesn't accept close substitutes for money when it auctions off Treasuries and collects taxes. You might be able to pay with those accounts, but the money needs to be converted into cash first, by a broker.

Paper pound notes are issued by Scottish commercial banks. In Scotland, that is what they use for paper money.

You'll have to excuse me if I'm having trouble following the non-American banking system (I freely admit that I don't have a clue about UK banking). But, if the government isn't the sole issuer of the currency, then that's not MMT.

[Gumby]

Gumby, Andrew Jackson bought up the entire US national debt and set up the free banking era (as I guess you know).

Yes, and then the country slipped into a terrible Depression:

In January 1835, Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished. The accomplishment was short lived. A severe depression from 1837 to 1844 caused a tenfold increase in national debt within its first year.
Source: http://en.wikipedia.org/wiki/Andrew_Jackson

Hmm... I wonder why. Could it be that the private sector was drained of cash?  ::)

In any case, I don't want to discount free banking. I'm sure it has good benefits. The only reason I enjoy understanding MMT is because it accurately describes the US monetary system.

[stone]

Gumby, do you think there is a cast iron way to prove that the treasury doesn't sell bonds and then use the proceeds to spend. I'm still not sure that there isn't scope for it just to be a chicken versus egg coming first non-distinction.

[Gumby]

Gumby, do you think there is a cast iron way to prove that the treasury doesn't sell bonds and then use the proceeds to spend. I'm still not sure that there isn't scope for it just to be a chicken versus egg coming first non-distinction.

I'm pretty sure I already proved it with the fractional-reserve requirements, primary dealer reserve and purchasing requirements, tax collecting drain, and private interest payments that the private sector needs to take care of all on its own somehow before it can buy any Treasury bonds. Basically that there wouldn't be enough money in the private sector to create future loans to take care of all of these private sector drains without new reserves coming in first.

I suppose another way to prove this is by looking at the debt ceiling crisis. The Treasury claimed we would hit the debt ceiling in March of 2011, but was able to keep spending until August by using "Emergency Measures". Seems like that would have been impossible without spending first. I'll need to do more research to see if I can find anything more concrete. It's a good question.

[Gumby]

Also, the fact ever since the Continental Congress there's never been a failed Treasury auction in the history of the United States regardless of what the private credit situation and tax drain was in the private sector (the auctions are always over-subscribed by 2:1 or more). This alone suggests that the money would to buy the bonds would have to have been spent into existence first.

[Gumby]

Stone... I think I may have figured it out. But, this is just a guess....

According to the GAO:

Debt held by government accounts represents the cumulative surpluses, including interest earnings, of these accounts that have been invested in Treasury securities. The special Treasury securities held in these government accounts represent legal obligations of the Treasury and are guaranteed for principal and interest by the full faith and credit of the U.S. government. This debt reflects a burden on taxpayers and the economy in the future.

Whenever a government account needs to spend more than it takes in from the public, the Treasury must provide cash to redeem debt held by the government account. The government must obtain this cash by increasing taxes, cutting spending, borrowing more from the public, retiring less debt (if the budget is in surplus), or some combination thereof.
Source: http://www.gao.gov/special.pubs/longter ... asics.html

I could be wrong, but the way I read this is that if the government needs to send out more Social Security, Medicare, and Military Retirement checks than those funds are able to collect (which is always), the Treasury just pays the check and then needs to raise the cash by auctioning bonds at some point. Those programs typically get spent into the economy pretty quickly. The statement is vague, but it definitely doesn't say that the Treasury needs to obtain the funds first. And if it did need to obtain the funds first, it probably wouldn't need the separate funds in the first place.

So, it sounds like it just pays the Social Security, Medicare, and Military Retirement checks first and raises the cash later. People would be pretty unhappy if they didn't those checks in a timely fashion. And you always hear people saying (including Harry Browne) that the government is always borrowing from these programs to pay its bills.

Anyway, I'll keep looking into it, but I think that may be how it all goes down.

[moda0306]

I find it odd that people would think that any trust fund (assuming it's a "real" trust fund... which it mostly isn't in the sense of actual limitations posed on government) set up for the task of providing seniors ultra-safe  Social Security payments should be "invested" in anything but treasury bonds... maybe a PP would be better, but absent that, if we even DID have a real trust fund, we would fully expect that the trustees invest in treasuries.

Social Security is supposed to be the backstop of everyone's retirement cash flow... not the icing on the cake (though young blokes like myself view it as the latter).

[stone]

Gumby, to me it all looks as though it is happening simultaneously. There is plenty of money around with nothing better to do than be spent on bonds. There are bonds being issued and there is government spending. With all of that going on at once who is to say which leads to what?

Historically monarchs used to get private loans from private banks. That was very much endogenous private credit. I can't help wondering whether that can't just be followed through to our current government financing arrangements. In the 1700s and 1800s, the Rothschilds didn't dig up a load of gold to lend out. They built their empire by credit money creation didn't they? I really don't know about all of this though.

[moda0306]

Maybe we're getting lost in the details while the answer is staring us right in the face in terms of the real significance of all this... as stone said... it's all kind of happening simultaneously.

For the treasury, spending involves both adding $1 and taking $1 from the economy, and issuing $1 in bonds into the economy.  To the people involved, $1 of asset was added to their balance sheet.  The bond-holder may not specifically use the bond to buy milk or bread or a plasma tv, but it's not because their savings is in the form of a bond... it's because of their will to save in a common currency they see sticking around for a while.  The bond is simply an attractive means for them to save without 1) just sitting on the cash itself, or 2) loaning the money to the private sector.  The VAST overriding factor is the will to save... this can't be overstated... people saved gold because it was the common currency, and often accepted zero interest for the priviledge of simply holding it themselves.  In a low inflation environment with over-leveraged players, cash is almost the same.

The fed makes sure nothing horrible accidentally happens in this process that causes a harsh bump in the road.  The person (imagining a discerning bond customer deciding what to do with his money) just received a bond from the treasury because of his will to save and the apparent liquidity.  The will to acquire dollars for savings & deleveraging in a balance sheet recession is very, very strong.  Low yields are almost irrelevant to people sitting on net negative financial assets.  Swapping financial assets for other financial assets is not fixing that overall problem... there are no new assets in the system to soak up the liabilities that are staring people in the face every time they look at their credit card bill and underwater mortgage.  We know the fed is going to step in with an asset swap... it's whether the treasury chooses to "stimulate" us or not with new financial assets that will fundamentally affect our financial balance sheets, and therefore how we engage each other in the economy.

[Gumby]

OK... I discovered an answer. It seems we were all correct and we were all wrong. Scott Fullwiler describes how the reserves to purchase Treasuries always exist in advance:

http://pragcap.com/mmt-and-the-operatio ... ary-system

I recommend reading the entire article, but here is the part that applies to the discussion at hand...

Since under flexible exchange rates it is the currency issuing government, self-imposed constraints are simply that—self-imposed and not operational. For MMT’ers, concerns that a nation cannot “afford”? to put idle capacity to use through tax cuts or appropriately targeted spending (i.e., NOT bailouts of the financial system or pet political projects—MMT’ers dislike those as much as anyone) are akin to a person with his/her shoes tied together concerned that he/she can’t run.  Indeed, it is the very fact that such self-imposed constraints can be and have been disregarded in the past when it has been deemed desirable (e.g., the law requiring that the Fed only purchase Treasury obligations in the open market has been periodically relaxed) that demonstrates who is in charge—as Marshall Auerback recently put it, particularly where fiscal actions, such as military appropriations in a time of war, are deemed important, “we don’t go to China to give them a line-item veto for what we can and can’t spend.  We just spend the money.”?

The self-imposed constraint for a sovereign currency issuer is thus clearly quite different from the constraints on, say, households or firms or even state governments, which truly do not operationally or otherwise have the ability to issue a non-convertible currency—these entities can most definitely find themselves in the metaphorical position of having their shoes tied together and no ability to run, or walk for that matter, as the constraints are obviously not merely self imposed.  This is not the case for the sovereign-currency issuer—if it pretends that its self-imposed constraints are of the same character as operational constraints on households or state governments, the result can be involuntary unemployment, retirees below the poverty line, military defeat, and so forth.  In other words, while the ability to “just spend the money”? is recognized in times of war or when a financial bailout is deemed necessary (by politicians, at least), MMT’ers want it to be just as obvious when the issue at hand is involuntary unemployment, crumbling infrastructure, children or retirees living below the poverty line, a major city devastated by natural disaster, and so forth.  Please note that this is not to say that such a government should always spend simply because it can operationally—that would be ridiculous—but, rather, that there is no such thing as it not being able to ”?afford”? to put idle capacity to work; the appropriate constraint to consider is whether there is idle capacity in the first place, while also recognizing the obvious point that not all fiscal actions are equally efficient.

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 non-government sector, and this is true whether or not the Fed is legally prohibited from providing overdrafts.

However, the statement that “deficits or Fed lending logically precede tax payments and bond sales”? should not be interpreted as “MMT’ers think there is no legal obligation that the Treasury have balances in its account before it spends or are otherwise ignoring the existing law prohibiting Fed overdrafts for the Treasury.”?  As I noted above, it is clear that the Fed cannot legally provide overdrafts to the Treasury, and every MMT’er does in fact understand this—the key is to understand what “deficits or Fed lending logically precede tax payments and bond sales”? does and does not mean.  That is, when MMT’ers say the latter, they are effectively saying “deficits or Fed loans logically precede taxation and bond sales as an operational reality of the monetary system”? (the general case), and this and the statement “the Treasury must have positive balances in its account prior to spending under current law”? (the specific case) are in fact not mutually exclusive.  Both can be and are true—the government can and does require itself through its own self-imposed constraint to obtain credits to its own account at the Fed that were created via previous deficits or Fed lending before it spends again.

Finally, to fully understand the operational realities associated with the Treasury’s account at the Fed, it must be recognized that the lowest rate the Treasury would reasonably expect to pay on the national debt in the case of overdrafts on its account would be the Fed’s target rate.  Operationally, the Fed would have to pay interest on reserve balances at its target rate or otherwise offer its own time deposits at competitive rates in line with the current and anticipated target rates to drain the reserve balances and achieve its target rate (in the case that the remuneration rate on reserve balances is below the target rate or even zero), both of which reduce the Fed’s profits returned to the Treasury and act functionally like debt service for the Treasury.  The situation is unchanged even if the Treasury deficit spends via a “helicopter drop”? of pure cash or coins, since the private sector will deposit the vast majority in banking accounts, and banks will return excess vault cash to the Fed in exchange for reserve balances.

One can then think of three different degrees or “forms”? (to borrow the taxonomy used by financial economists in describing the efficient markets hypothesis) related to deficits and interest on the national debt for a currency issuer under flexible exchange rates.  The “strong form”? deficits would be where the Treasury has an overdraft or similar at the Fed and interest on the national debt is essentially at the Fed’s target rate or on average a bit higher if the Fed issues time deposits to drain reserve balances.  While the “strong form”? is operationally “pure,”? it is again obviously not current law in the US.  The “semi-strong form”? deficits would be where the Treasury is not provided with overdrafts and must issue its own securities to have positive balances in its account before spending again while the securities issued—given their zero-default-risk that results from operational realities and the fact that any “constraint”? on the Treasury is self-imposed—mostly arbitrage with the Fed’s target (for short-term Treasuries) and the expected target rate (for longer-term Treasuries) aside from some technical effects (like convexity) and some demand/supply issues (like maturity and liquidity at different maturities).  Examples of the “semi-strong form”? would be here and here.  The “weak-form”? deficits would consider that bond markets might at some point choose to repudiate even a currency-issuer’s debt with zero default risk (the “semi-strong form”? does, too, but presumes the effect is temporary as arbitrage relationships would over-rule at least in the medium-term), but recognizes that the Fed always has the ability to set the market rate on Treasuries as long as it is willing to buy all quantities offered at its bid price (and has no operational or even legal constraint for doing so).  Examples would be the Fed’s “Operation Twist”? or the Fed prior to the Treasury Accord, or in the non-currency issuer case, consider how the recent EMU crisis quickly faded once the ECB began purchasing the debt of troubled member nations.

All three forms, while different in degree, agree that the interest on the national debt for a sovereign currency issuer under flexible exchange rates is a policy variable—not a market-set rate—or at the very least could be if the government so desires.  And note that this is the case whether or not the Treasury receives overdrafts at the Fed.  In other words, since the outcome is roughly the same in all three cases, it really doesn’t matter if the Treasury receives overdrafts in its Fed account or not—if it can sell its debt at roughly the Fed’s target, then there is no economically meaningful difference from the Treasury’s perspective between the government enabling itself to obtain an overdraft and the government forbidding itself from doing so.  That self-imposed “constraint”? is really not a constraint at all even if it is never abandoned.

Source: http://pragcap.com/mmt-and-the-operatio ... ary-system

Whew! 

[stone]

Gumby, what I think is interesting though is that when I commented on here about the US system in reality working just like any other fiat system irrespective of "central bank independence" (ie that in reality the Fed and the treasury acted in a consolidated way), HB reader said that I was mistaken. He said that the Fed genuinely was not joined at the hip with the treasury,the no overdraft rule between them was significant and that central bank independence was a critical part of the American way just like an independent judiciary. I thought he was wrong and still do and I would probably extend my view to thinking that the TBTF banks are also integrated into the American state. BUT he worked in the treasury. I know nothing apart from snippets read on the web. His view is probably that of the bulk of the people who actually work in the system.

I also think that an understanding of monetary operations is VERY incomplete if settlement times are not fully taken on board. Many commercial transactions have settlement 30days AFTER the goods or services have been provided. That limbo time makes an enormous difference to how things actually work.

[Gumby]

Actually, the Treasury used to be able to take a temporary loan from the Fed (between 1942-1981). According to a 2006 report by the GAO.

Appendix II: Background on Previous Treasury Draw Authorities
In the past, Treasury had access to both a cash and securities draw authority. Intermittently between 1942 and 1981, Treasury was able to directly sell (and purchase) certain short-term obligations to (and from) the Federal Reserve in exchange for cash. Congress first granted this cash draw authority temporarily in 1942, allowed it to lapse several times, and extended it 22 times until 1979, when it modified some of the terms and added controls. In 1979, Congress also authorized a securities draw authority, which permitted Treasury to borrow securities from the Federal Reserve, sell them, and then repurchase the securities in the open market and return the securities to the Federal Reserve within a specified period. The securities draw authority was never used.

After Congress authorized Treasury to earn interest on its Treasury Tax & Loan (TT&L) account balances in 1977, Congress allowed both draw authorities to expire in 1981.
Source: http://www.gao.gov/new.items/d061007.pdf

The report recommends additional backup funding options and also looks at how the Treasury canceled an auction and used certain cash balances to help meet its obligations during the week of September 11, 2001. Clearly the Fed helps the Treasury out when it needs to.

[stone]

When push comes to shove all kinds of things get done. The British government requisitioned private land etc in WWI and WWII. Basically it is only a "voluntary constraint" that the goverment doesn't conscript everyone and requisition everything or simply drop a H-bomb on us. That is why I feel it is a bit of a mute point when MMTers describe something as being "meerly" a voluntary constraint. Basically our whole world is meerly a voluntary constraint.

[Gumby]

When push comes to shove all kinds of things get done. The British government requisitioned private land etc in WWI and WWII. Basically it is only a "voluntary constraint" that the goverment doesn't conscript everyone and requisition everything or simply drop a H-bomb on us. That is why I feel it is a bit of a mute point when MMTers describe something as being "meerly" a voluntary constraint. Basically our whole world is meerly a voluntary constraint.

Excellent point.

[MediumTex]

When push comes to shove all kinds of things get done. The British government requisitioned private land etc in WWI and WWII. Basically it is only a "voluntary constraint" that the goverment doesn't conscript everyone and requisition everything or simply drop a H-bomb on us. That is why I feel it is a bit of a mute point when MMTers describe something as being "meerly" a voluntary constraint. Basically our whole world is meerly a voluntary constraint.

Excellent point.

When you look at what the United States was able to do from the beginning of 1942 to the Spring of 1945 in terms of mobilization, capital investment, technological advancement, re-tooling of infrastructure, revisions of cultural norms, etc. it's really sort of amazing.

That's about 40 months from start to finish.

[stone]

British people even ate brown bread during WWII. Where there's a will, there's a way .

[MachineGhost]

New contracts after Oct 1977 can legally use gold clauses.

http://www.law.cornell.edu/uscode/31/5118.html

MG

"The legal tender laws force all contracts to be repaid in dollars."

I've heard this one before many times, but that's also unconvincing to me.

Before paper money, and before even gold was used as money, societies used other things like shiny rocks, gems, and colorful feathers as money.  They all had value because they were portable, didn't degrade or spoil with time, and were generally accepted in exchange for goods and services.  I think, even in the absence of a government or taxes, the fiat money would still retain its value until something else replaced it as the Standard medium of exchange.

Of course, this doesn't say anything about how MUCH value the currency has... as that's determined by the various measurements of the money supply and money velocity, versus the supply of goods and services, etc.