Gyroscopic Investing

moda0306 wrote:Are we actually wealthier for the government issuing base money and giving it "value" via threat of taxation/jail, or are we simply making our real wealth more efficiently transmittable throughout the economy.

Maybe it depends. If I build the government a bridge, we are all wealthier by the additional $50,000 — since a real asset was created. If I just got a government handout, I'm pretty sure the private sector wouldn't be any wealthier from it.

Gumby,

That bridge theoretically could have been built by the government taxing/using private sector currency, though (maybe imagine gold coins).

We didn't need a sovereign fiat currency to build a bridge.

I guess my point is that on some levels the gov't can't create wealth, but it can set "rules of the road" that in real life make it much easier for people to trade REAL value for value in society without having to bartar.

Much like a freeway only being a medium of efficient transportation with no real value in-and-of-itself, maybe the value in a currency isn't the currency itself, but its ability to keep people productive and efficiently meeting each other with services to offer without having to resort to bartaring.

moda0306 wrote: Gumby,

That bridge theoretically could have been built by the government taxing/using private sector currency, though (maybe imagine gold coins).

We didn't need a sovereign fiat currency to build a bridge.

Yes. That's true. But, I'm not sure if we'd be wealthier or not in the gold standard system. Maybe LW or Stone can help us out with the gold standard-era economics. I mean, in a gold standard system, isn't the idea to borrow more (convertible) gold from other countries when your country doesn't have enough gold holdings to build a bridge?

moda, I think you are asking about exactly the same phenomenon that makes me dislike the MMT prescription for budget deficits. The government budget deficits put money in at one end. Wealth rises through the system like fat globules in a stew and builds asset prices. It has less effect on wage inflation. Net financial assets build up and there is more paper wealth and so there is more ability out there to buy any labour offered. Another way of saying the same thing is to say that labour has been devalued. Deficits devalue labour.

Paper wealth is just a way to portion up the real world. All that increasing paper wealth can do is redistribute power over other people's time and possessions. It can only create (or destroy) real wealth insofar as it alters how much real wealth people waste or create.

Gumby,

Yes... and I think that's the problem... theoretically, a gov't could tax in widgets or fur pelts if it didn't have gold, but other countries are going to be annoyed dealing with things that aren't efficient mediums of exchange.

It's not that there's not enough productive capacity or real wealth in society, it's that people and governments can't efficiently trade back and forth because there's not enough medium of exchange to do so.

Adding a fiat medium exchange probably adds zero real value to society in a certain sense, but allows people to more efficiently realize their full productive potential because they're not so busy trying to bartar with people.

stone wrote: Paper wealth is just a way to portion up the real world. All that increasing paper wealth can do is redistribute power over other people's time and possessions. It can only create (or destroy) real wealth insofar as it alters how much real wealth people waste or create.

Stone,

Phenominal choice of words that should be shouted from the mountain tops...and this is coming from an MMT'er.

I think you just hit the nail on the head, and probably gave every Austrian economist out there a huge smile.

That said, and I've said this 100 times, if there's not enough medium-of-exchange in the economy for a given productive capacity, real wealth will be wasted in the form of high unemployment.  I think you try to get around this by making people run from the asset tax by keeping their savings productive, but I don't think that is an efficient allocation of resources any more than running deficits.

It's how those deficits are acquired and the moral hazards we've created that make asset prices go way out of wack, I believe.

moda, the old school economists in the 1700s and 1800s said that the amount of medium of exchange didn't matter because it is exactly the same to have lots of $s with each $ having little value or fewer with each one having more value.

It is entirely a matter of distribution.

Let's say the government were by decree to say that all dollars were worth $1000 and all debts and wages and prices were to also change 1000x; then nothing would change. Deficit spending is not about creating "sufficient" medium of exchange. It is only about warping the distribution of wealth. If there was only one USD in existence but wealth was distributed evenly, then the economy would hum along merrily with all transactions being conducted in trillionths of a dollar amounts.

Agreed and agreed.

But, there is still a minor question I have about the asset tax and no government spending. To get back to the mathematical problem I mentioned above...

If a government didn't spend and only taxes on assets, it would drain the base money needed to back private loans.

Or is the citizens dividend just a way to replace that lose base money?

The problem is that it would seem that the banking system needs a slowly increasing base money supply in order to support a fractionally higher rate of loan production. (Setting aside that loans don't actually multiply like that in reality)

On day 1 it may not matter, but going forward it does.

You want your medium of exchange to be able to have about the same amount of purchasing power at the end of the year as it did at the beginning (97-98% is still ok enough).

If you hold a currency that doesn't increase in quantity with the rest of the economy you hold what will be a claim on more and more real wealth/resources.

This is very important, because a medium of exchange that buys more and more every year is almost definitely going to result in wasted real wealth creation.

I realize your asset tax tries to fix this, but I'm arguing with those 1800's economists... not you.

Gumby, I was meaning having a balanced government budget. For every dollar the government spent on the military or schools or the citizens' dividend or whatever it would match that with a dollar of asset tax.

stone,

Yes I see that your asset tax fixes this... I was arguing with the old economists... not you.

How would fractional-reserve banking work in your asset tax & citizen's dividend world?  I think that's where the bubbles come from, not M0.

moda0306 wrote:How would fractional-reserve banking work in your asset tax & citizen's dividend world?  I think that's where the bubbles come from, not M0.

I have the same question. If we say that the net financial assets in the private sector were $1,000,000, and all of the spending and taxation never changed that... then the static supply of base money would limit the amount of loans that banks could produce, for eternity. There wouldn't be enough money floating around to pay for things as the economy grew. My understanding is that you need to maintain a certain percentage of base money to back additional bank loans.

I think that one of the key problems of our system is that it leaves expansion of the banking system (as a proportion of the economy) entirely open ended. Obviously someone has to grow food to feed the bankers. The banking system has to remain at less than 100% of the entire economy. We might as well keep the banking system at the size it was in say 1960 (as a proportion of the economy) but with reductions because IT now makes basic banking so much less labour intensive. The need for so much private credit is just an artifact of uneven wealth distribution. If people have money of their own then they don't need loans.

Well I don't think we should "keep" sectors at certain sizes just for the sake of it... let's look at the inefficiencies and inneffectiveness involved in the financial industry, and see if simple regulations can fix some of them... TBTF, reserve requirements, holding their own mortgages, etc.

If it naturally shrinks in size, and the economy still grows, then that's a sign we're probably doing something right, but maybe shouldn't be an end in itself..

Sorry, I'm having trouble following here...

If there are hundreds of thousands of more people, services, opportunities and companies in existence than there were in 1960, shouldn't the base money supply increase to reflect that? Otherwise all of those additional companies and people would be fighting over the same 1960s-sized pile of base money that's split across a larger economy. Everyone would individually have less and less money in their pocket as the economy grew (if it was even able to grow).

I think we should take some of our best discussions on monetary/fiscal policy & macroeconomics and put a link to them all in one new thread.

There's lots to learn from our convos.

Gumby wrote: This tells me that you don't understand where money comes from.

Can we not place everything in terms of "so long as you disagree with me, you don't understand anything about X!  And that goes double for you, <every central banker and mainstream economist in the world>!"?  People aren't going to agree on everything.  This doesn't require anyone to be a "big dummy".

Gumby wrote: That's correct. And those mortgage-backed securities then disappear from the private sector. Nobody in the private sector owns them anymore.

The Fed "only" owns something like $1.6 trillion in US Treasuries.  The Fed could, today, dump all of these Treasuries and replace them with MBS debt.  And this would only soak up a fraction of the total MBS market!

And yet after all is said and done, we wind up with the same money supply!  If we are able to create the same money supply as we have today without purchasing any Treasuries at all, I see no reason that deficit spending is a requirement for creating whatever supply of money we wish.  You don't need Treasury debt.

No deficit spending necessary.

Gumby wrote: The Fed paper I linked to above already explains why money rarely multiplies through the fractional-reserve banking system.

Perhaps you mean that it multiplies unpredictably...?  Because multiply it does.

Money has multiplied through the fractional reserve system for decades.  When banks are maintaining low levels of reserves, they will basically create as much money as the central bank allows them to.  When they are maintaining high levels of reserves (such as after 2008), the central bank has less control via reserve requirements.

LW,

Saying that the treasury doesn't need to deficit spend because the fed can buy MBS is putting the cart before the horse.

A mortgage is private-sector leveraging of base money supply.  To get that base M0 money supply in the first place, you need to spend it.  You can't fractionally reserve nothing.  You can't leverage nothing.  You can't loan somebody $200k to buy a home without SOME base money.

If it wasn't for M0, there'd be no loans in US $'s for the fed to buy.

Lone Wolf wrote:

Gumby wrote: This tells me that you don't understand where money comes from.

Can we not place everything in terms of "so long as you disagree with me, you don't understand anything about X!  And that goes double for you, <every central banker and mainstream economist in the world>!"?  People aren't going to agree on everything.  This doesn't require anyone to be a "big dummy".

My apologies. But it's an operational fact. The Fed can't create new financial assets without taking other assets away from the private sector. Only the Treasury can spend new net financial assets into existence.

Lone Wolf wrote:

Gumby wrote: That's correct. And those mortgage-backed securities then disappear from the private sector. Nobody in the private sector owns them anymore.

The Fed "only" owns something like $1.6 trillion in US Treasuries.  The Fed could, today, dump all of these Treasuries and replace them with MBS debt.  And this would only soak up a fraction of the total MBS market!

It makes no difference. If the Fed "dumped" Treasuries, they'd be simply accepting cash in exchange for those Treasuries. The net financial assets in the private sector would still be the same at the end of that transaction.

Lone Wolf wrote:And yet after all is said and done, we wind up with the same money supply!  If we are able to create the same money supply as we have today without purchasing any Treasuries at all, I see no reason that deficit spending is a requirement for creating whatever supply of money we wish.  You don't need Treasury debt.

No deficit spending necessary.

Ah... but you do. Because you still won't discuss the simple problem here: If the government takes in more taxes than it spends (a surplus), then by the laws of logic and mathematics the private sector will be losing more base money than it receives from the government. When the amount of base money recedes, it reduces the amount of loans that can be procured. And eventually there wouldn't be any base money left to back any loans. And let's not forget that we can't pay our taxes with loans from a bank. Mathematically we'd never be able to pay those loans back. We'd all default.

Lone Wolf wrote:

Gumby wrote: The Fed paper I linked to above already explains why money rarely multiplies through the fractional-reserve banking system.

Perhaps you mean that it multiplies unpredictably...?  Because multiply it does.

False. The money multiplier is currently below 1.

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You need to be above 1 for the money to multiply through the banking system. the M1 money multiplier was hardly ever above 3. The Fed paper explains why. The Japanese have also shown this as well.

Lone Wolf wrote:Money has multiplied through the fractional reserve system for decades.  When banks are maintaining low levels of reserves, they will basically create as much money as the central bank allows them to.  When they are maintaining high levels of reserves (such as after 2008), the central bank has less control via reserve requirements.

You do realize that mathematically the base money supply needs to increase in order for banks to keep multiplying larger loans, right? If the base money supply didn't increase, you'd eventually run out of base money to back additional loans. So, it's not really possible to keep loaning money out over and over again because otherwise each time the loan would have to be smaller and smaller.

LW, I'm sorry if you think this is about disagreeing or having a different point of view. But, we are talking mathematical facts here. If the government taxes money out of the private sector each year, and doesn't spend it back into the private sector, eventually the private sector would run out of money to pay its taxes. There is no way that the private sector could take out loans to pay its taxes — we'd all default and run out of base money if that happened. It's a mathematical fact because there would be less base money to back ever-expanding loans.

Once again...

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

There is no other mathematical way to pay for taxes without the government handing out fresh money to do so.

Gumby wrote:

Lone Wolf wrote: The Fed "only" owns something like $1.6 trillion in US Treasuries.  The Fed could, today, dump all of these Treasuries and replace them with MBS debt.  And this would only soak up a fraction of the total MBS market!

It makes no difference. If the Fed "dumped" Treasuries, they'd be simply accepting cash in exchange for those Treasuries. The net financial assets in the private sector would still be the same at the end of that transaction.

What about if the Fed pays $100 for an asset that the private sector would have only paid $50 for (such as a mortgage on a house worth much than the balance on the loan)?

If the Fed used this sort of maneuver (i.e., paying more than an asset is worth at the time), wouldn't this increase the net financial assets in the private sector? 

moda0306 wrote: Saying that the treasury doesn't need to deficit spend because the fed can buy MBS is putting the cart before the horse.

If it seems fair to you, let's set aside the "origin story" of dollars (which, IMO, can't be properly told without using the word "gold") and think about the future.

If the government never issued any more Treasury debt and started running balanced budgets, the Federal Reserve would still be able to expand the money supply by purchasing whatever assets it wishes.  Its Treasury debt could be discharged (gradually, if you prefer) and replaced with other assets.  The end result could be a Federal Reserve with no government debt on its balance sheet.

I think we agree that this is possible but if not, let me know what I've missed.

If that is the case, how can it be true that dollars can't be created without the government first "deficit spending them into existence"?  How did we pull off what MMT seems to say isn't possible?

MediumTex wrote:

Gumby wrote:

Lone Wolf wrote: The Fed "only" owns something like $1.6 trillion in US Treasuries.  The Fed could, today, dump all of these Treasuries and replace them with MBS debt.  And this would only soak up a fraction of the total MBS market!

It makes no difference. If the Fed "dumped" Treasuries, they'd be simply accepting cash in exchange for those Treasuries. The net financial assets in the private sector would still be the same at the end of that transaction.

What about if the Fed pays $100 for an asset that the private sector would have only paid $50 for (such as a mortgage on a house worth much than the balance on the loan)?

If the Fed used this sort of maneuver (i.e., paying more than an asset is worth at the time), wouldn't this increase the net financial assets in the private sector?

Yes, it's a fudge. Though, in a way, the transaction is really retroactive for all practical purposes. In other words, the effect is no different than if the Fed made the exact same transaction a year or two earlier.

In a way, the Fed found a loop hole to put out a fire that started burning a year or two earlier. It's totally cheating the laws of space and time, but it was legal.

Lone Wolf wrote:If the government never issued any more Treasury debt and started running balanced budgets, the Federal Reserve would still be able to expand the money supply by purchasing whatever assets it wishes.  Its Treasury debt could be discharged (gradually, if you prefer) and replaced with other assets.  The end result could be a Federal Reserve with no government debt on its balance sheet.

I think we agree that this is possible but if not, let me know what I've missed.

If that is the case, how can it be true that dollars can't be created without the government first "deficit spending them into existence"?  How did we pull off what MMT seems to say isn't possible?

Because the Fed didn't create any new net financial assets in the private sector with the transaction you've described. All you've done is nationalize everything and increase the money supply in the process. Paying taxes drains net financial assets from the private sector. How do you replace the net financial assets that are being taxed away without government spending??

LW,

The entrance of fiat currency into the economy gives people "purchasing power."  Loans don't provide that in the same sense, since they show up as assets on one person's books and liabilities on another.

If you define "money supply" by M0, then yes, maybe you could consider this new money increasing the money supply.

Gumby and I prefer to think of any entrance of fiat paper into the economy as only increasing the money supply if there's no like-kind exchange of other financial assets.  Deficit spending accomplishes this.  Swapping paper assets does not, even if it's MBS' at FMV.  You will not fundamentally change the purchasing power of mortgage holders by giving them cash in exchange.  Purchasing power drives demand and inflation (as does private-sector leveraging).  The entrance of NEW net financial assets into the economy is what can drive "too much money chasing too few goods."  Swapping paper for paper has a much, much more muted effect as it only touches the liquidity of assets involved, not the number of assets in whole.