2012 performance

[Gosso]

So if the Euro came from Deutsch-Marks (and other European currencies), where did the Deutsch Marks come from?

They came from "Bunds" — which is the equivalent of Treasuries. Remember, countries used to have gold-backed money, so they would issue Treasuries — or in Germany's case, Bunds — whenever they didn't have enough gold in their vaults. Now, countries just issue government bonds whenever they want to spend since all of these debt laws are already in place and worked pretty well in the past.

All of this "money as debt" idea dates back to 1694 when the Bank of England was formed. Bankers figured out they could lend gold (and paper gold) out to governments and charge everybody interest on loaned fractional reserves. That's when the first "national debt" started, and there has always been national debts ever since.

It appears the Deutsche Mark traces back through several other currencies, but eventually goes back to silver coins called the Vereinsthaler whose value was their weight (16 2/3 g) in silver.

The point I'm working toward making (haven't done all the research, thus the questions) is that every fiat currency I've researched at some point originated as either gold or silver money.  Through a string of deception and fraud by governments and banks, that money is exchanged for paper currency and then devalued to the point where they have to exchange the old worthless currency for new soon to be worthless currency.

Also, to say that these currencies have worked well in the past depends on your perspective.  They've worked well for whom?  They've certainly worked well for governments and banks, but I'd argue they've been horrible for the average people who've seen their live savings become worthless over and over as these currencies are inflated and then collapse.

Wouldn't placing your money in a savings account alleviate the problem of the dollar depreciating?  So really your purchasing power as been preserved by receiving the interest.  Although at the moment savings accounts are receiving negative real interest rates, but they been positive for a majority of the past few decades.

[Lone Wolf]

Why do you think that virtually no one understands what you have written above?

It seems that what many people believe to be true is the exact opposite of what is actually true.  That's a strange state of affairs.

Are you sure that's what's happening here?  Remember that we all have our own biases.  If we apply Occam's Razor, we get a simpler possible explanation:

• Some people are surprised by event X and want an explanation.  Of course, Event X may still be unfolding and could even elude our understanding entirely.  But as humans, we want answers now, especially ones that require us to discard as few cherished beliefs as possible.
• These people read about heterodox economic theory Y written by some eccentric guy named Warren Z.  This theory claims to explain everything that had been bothering them.
• Several weeks are invested in reading about this theory.  It's really, really, really complicated but at least it provides the blessed answers these readers were seeking.
• People with shared interests get one another very excited about this "new" theory.
• Now that they are in possession of a theory that has quieted their cognitive dissonance (and was, frankly, a real pain in the ass to slog through), it's annoying that others don't believe the same things.  The fact that Central Bankers and professional economists do not believe this new favorite theory must be due to some combination of ignorance, malice, and basic human stupidity.  The alternative is to have wasted time reading walls and walls of text and to be no closer to an answer.  No thanks -- better to stick with "all economists are idiots."

I've walked this road myself on a variety of topics and, unfortunately, I'm sure that I'll do so again.  I do not count myself as special in this regard.

But as a general rule, the greater the conspiracy theory one must embrace in order to prop up one's cherished beliefs, the greater the degree of skepticism those beliefs ought to receive.  (IMO.)

The point I'm working toward making (haven't done all the research, thus the questions) is that every fiat currency I've researched at some point originated as either gold or silver money.  Through a string of deception and fraud by governments and banks, that money is exchanged for paper currency and then devalued to the point where they have to exchange the old worthless currency for new soon to be worthless currency.

Exactly.  This is the answer to the "chicken or the egg" question of where the first fiat dollar originates from.  Generally speaking, fiat currencies attach themselves to existing gold-backed currencies and trap everyone in the tractor beam of legal tender laws.

If no government debt existed (yeah, right!) the Fed could buy something else.  There's clearly plenty of willingness to buy garbage like mortgage-backed securities even with plenty of government debt sitting around.  I've heard rumors that they sometimes even buy gold!

[Lone Wolf]

Rather than speaking in generalities, it's probably only fair that I rattle off bits and pieces of why I concluded that MMT was basically a bunch of well-intentioned hooey.  Off the top of my head:

• MMT artificially differentiates between government bonds (liability of the taxpayer) and other forms of debt.  (Issuing debt is something any corporation or government can do.  The power of the printing press, which rests with the Federal Reserve, is the real superpower.)
• MMT claims that taxation "destroys" base money.  In actual fact, such money is almost immediately spent again in order make purchases or to service debt.  So much for "operational reality".
• MMT recommends tax increases in order to halt inflation, when in reality there is no demonstrable correlation between the tax rate and the rate of inflation.  (See: the 1970s.)
• MMT views ever-escalating levels of government debt as not only a good thing but a requirement for a healthy economy.  This is nothing more than conflating the supply of money (determined by the Federal Reserve) with the "supply" of government debt.  You don't need this much debt.  When Harry Browne literally booed deficits in the final episode of his radio show, he wasn't being ironic. 
• MMT blames the dot-com bust (which had very obvious real-world causes) on the "Clinton surpluses".  Why ignore the fundamental causes to make such a stretch?  No surplus (real or imagined) preceded the 1980 or 1990 recessions.  They had fundamental economic causes, too, but fail to fit the "evil surplus" narrative.

I'm always surprised by the traction this theory has achieved with the community here.

[MediumTex]

Why do you think that virtually no one understands what you have written above?

It seems that what many people believe to be true is the exact opposite of what is actually true.  That's a strange state of affairs.

Are you sure that's what's happening here?  Remember that we all have our own biases.  If we apply Occam's Razor, we get a simpler possible explanation

Well, maybe I should just say that few people seem familiar enough with the MMT arguments to effectively refute them.

I'm not saying they can't be refuted, it's just that most people who discuss economic matters usually seem not to even be aware of them.

It has always seemed to me that in the overall economy there is a core reality of natural resources, labor and productive capacity.  With fiat money, we are basically adding to that core reality an entirely imaginary representation of value through what we call money.  MMT seems to grasp this imaginary quality of money, as opposed to the reality of the elements of the economy I mentioned above.

Back in the gold standard days, there was still an element of imaginary money in the form of credit, but there was also reality-based money in the form of gold that helped to anchor the imaginary money in reality to a great extent.  This still seems to be the basic paradigm that politicians and economists use when discussing economic and monetary matters, even though it seems obsolete.

[Gumby]

MMT artificially differentiates between government bonds (liability of the taxpayer) and other forms of debt.  (Issuing debt is something any corporation or government can do.  The power of the printing press, which rests with the Federal Reserve, is the real superpower.)

The Federal Reserve can only swap assets with the private sector. It doesn't have the authority to do helicopter drops. The Fed can only increase/decrease the base money supply — via swaps — which allows it to improve/reduce the environment for private credit issuance. So, yes, there is a difference between government bonds and other forms of debt. The issuance of government bonds is a net increase of financial assets in the private sector — as the government bonds are a risk-free currency and savings for everyone. The other forms of debt are not the same as they are nothing more than promises from corporations to find deliver money that already exists in the private sector. This is why we hold Treasuries in our Permanent Portfolios.

MMT claims that taxation "destroys" base money.  In actual fact, such money is almost immediately spent again in order make purchases or to service debt.  So much for "operational reality".

The money you pay in taxes is not transferred to the Treasury for spending. The money you pay in taxes is literally deleted from your bank's reserve account at the Fed and entered into a spreadsheet. The Treasury spends as much as Congress wants to, regardless of how much money it deletes from our banks' reserve accounts. There is no transfer of money into a giant Treasury bank account. It's just a fiat spreadsheet where it makes no difference how large or small the numbers on it are — from a solvency perspective.

MMT recommends tax increases in order to halt inflation, when in reality there is no demonstrable correlation between the tax rate and the rate of inflation.  (See: the 1970s.)

I'm afraid you can't argue that government spending causes inflation, while arguing that taxation is not deflationary. That makes no sense.

MMT views ever-escalating levels of government debt as not only a good thing but a requirement for a healthy economy.  This is nothing more than conflating the supply of money (determined by the Federal Reserve) with the "supply" of government debt.

We have a debt-based monetary system. All of our money comes from debt.

http://www.moneyasdebt.net/

http://en.wikipedia.org/wiki/Debt-based_monetary_system

Therefore, debt is necessary for base money to exist. And private credit could not exist without base money. So, yeah... debt it necessary. But, that doesn't make it a good thing. Debt has negative consequences too. The only point MMT/MMRsts are making is that there is no issue of solvency.

[Lone Wolf]

The other forms of debt are not the same as they are nothing more than promises from corporations to find deliver money that already exists in the private sector. This is why we hold Treasuries in our Permanent Portfolios.

By the same token, Treasuries are nothing more than a promise to extract money from a US taxpayer.  They are, therefore, a liability of the Treasury / US taxpayer and an asset of their owner.

The only meaningful "magic" happens when the Federal Reserve purchases these (and other) securities with money created out of thin air.

The money you pay in taxes is not transferred to the Treasury for spending. The money you pay in taxes is literally deleted from your bank's reserve account at the Fed and entered into a spreadsheet. The Treasury spends as much as Congress wants to, regardless of how much money it deletes from our banks' reserve accounts. There is no transfer of money into a giant Treasury bank account.

You're mistaken.  The Treasury has an account at the Fed.  Tax money isn't destroyed -- it pours into (and out of) this account.  See: http://www.frbatlanta.org/pubs/frstruct ... ctions.cfm

Incoming federal government revenues are credited to the U.S. Treasury's accounts at Reserve Banks. Most of these revenues come from transfers of funds from depository institutions in which the Treasury initially deposited its receipts from taxes and the sale of securities

Again, tax money is not in any way "destroyed" but instead almost immediately spent again.  MMT is way off the mark and IMO materially degrades understanding of operational realities.

I'm afraid you can't argue that government spending causes inflation, while arguing that taxation is not deflationary.

I'm not an MMTer and therefore believe no such thing.

The supply of money growing more quickly than the demand for money is what causes inflation.  Banana republic style "let's print it up!" government spending (a la Zimbabwe) is of course likely to cause such an event.  Growing an enormous debt makes governments much more likely to pursue inflationary solutions down the line as the easiest way out of the trap the debt creates.

If high taxes had no effect on inflation in the 1970s, why (and by what mysterious mechanism) does MMT expect them to be ideal inflation fighters in the future?

[moda0306]

If we balance our budgets and the fed raises interest rates to match inflation (which would likely be negative if we balanced the budget, but I digress), but we instituted all the confiscatory practices of the Mugabe government, corruption and all, we'd get crippling inflation, if not hyperinflation.

Think about it... taking the farms from some Americans and giving them to other Americans that don't know how to farm?  I'm probably forgetting the multitude of other horrible things done by their government... our economy/currency wouldn't survive in tact.  The price of food would skyrocket.. economic confidence would fall off of a cliff.  

LW, would you disagree with this?  Don't you think the hyperinflation was just how utterly failed economic policy manifested itself in the face of printing money?  Do you see anything remotely similar in the U.S., where we fortunately have one of the least corrupt governments and highest respect for private property out of any country in the world... for all its faults?

To me, this little mental exercise illustrates that a hyperinflation is as much, if not more, about non-monetary happenings than monetary ones.  You can use paper to improve the balance sheets of a productive, stable economy... you can't paper over miserable economic policy and gross confiscation.  In fact, telling a skewed story of hyperinflation in Zimbabwe undermines the focus on the truly awful things we should focus on... the potentially catastrophic consequences of a crash in productive capacity and widespread corruption.

Further, your observations on the fed & treasury are incomplete.  If the fed's job is to ensure the payment system works, and that system relies on the liquidity and risk-free nature of the government itself, does it really matter if the treasury has an account with the fed, and what that balance is? The "operations" of the fed contain two levels... the accounting level, and the real operational level.  The treasury has an account at the fed that goes up and down like a score board.  The fed's job is to ensure the stability of the payment system, so tell me if you think this account is an accounting gimmick (like you probably would claim the SS trust fund is) or a fundamental reality of the treasury's spending power.  The fed has a "balance sheet" built up, for the most part, of financial assets created in fiat by government.  Does that sound more like an accounting gimmick or a fundamental reality of the fed's "wealth"?  

The way these two entities work together, in reality, tells a very different story than one that simple accounting identities could tell... one that's effectively all-but-identical to a debt-free money system in terms of constraints and risks (not so much, though, in terms of the banks' abilities to have more control of the system).  HB realized this and bet the farm on it with the bond portion of his portfolio.  MMT/MMR realizes this.  They've given more clarity to the nature of the fed/treasury operations in one blog post than Austrians & Keynesians have been able to do in 40 years of arguing about fiat money.   It's a fiat money system built into a system of gold-standard accounting rules.  Trying to use accounting identities to mold your understanding of our monetary system is like retrofitting a shiny-new big-block V8 into a suped-up Model A, and expecting it to still top out at 40 mph "because it's only a Model A."

[moda0306]

LW,

You describe treasury bonds like they are an instrument in which there is an expectation by the bond holder that the gov't either tax or borrow to pay them back at some future date.  Not only is this not in the nature of the contract, it would create default risk, something that people specifically buy treasuries to avoid.

So not only is there no expectation of tax collection or bond issuance to pay us bond holders back, we actually expect that to not be the case, and would invest differently if it was the case.  We have to look at bonds not just simply how we'd like to visualize them, but how the market actually visualizes them and the role they play in a functioning economy.  Framing treasury bonds the way you do is trying to use accounting identities to define operational realities.  To expect the treasury to have to tax or issue bonds before it spends currency into existence is logically inconsistent.  We'd  more or less have no currency if this were the arrangement.  The treasury can't borrow/tax money that doesn't already exist.  So it's a mistake to look at how the fed short-circuits that logical impossibility as cheating, because there'd be no game to cheat at if the treasury and fed didn't do their dance.

[Storm]

Gumby,

Thank you for your patience and detailed answers. Forgive the simplicity of this observation. Given that debt has not been the magic elixir to prosperity in most countries, like those in Africa, might these observations be due to an effect, and not a cause? That a nation's ability to have a successful debt based economy is due not to the debt itself, but rather the underlying societal structure, demographics, and natural resources that makes its debt desirable to own? This seems like a fundamental chicken and egg issue that I am having a hard time getting my head around.

6 Iron, I think the reason why Gumby's amazing responses are not understood by the general public is that even Warren Mosler doesn't advocate crazy government spending and huge deficits.  He acknowledges that if government spending is too large or taxes too small, inflation will occur because too much money is chasing too few goods.  What he proposes is simply setting the deficit to a reasonable level necessary to ensure GDP expansion, perhaps 5% of GDP annually.  He also acknowledges that this shouldn't be set in stone and temporary needs might increase or decrease this amount of deficit.

History is full of bad actors.  If an African nation decided to print money and spend a deficit of 1000% of GDP, of course history tells us there will be inflation, the public will revolt, and bad things will happen.  Warren Mosler proposes simple common sense solutions to economic issues.  You have to rely on people not only understanding how reserve banking works, but also having the common sense to say "if 5% GDP to deficit spending is good, 10% is not necessarily better."

[Lone Wolf]

Don't you think the hyperinflation was just how utterly failed economic policy manifested itself in the face of printing money?

You're overthinking this.  We can speak much more generally.  Inflation is simply the result of money supply outstripping money demand.  Very high levels can come about in many different ways including economic mismanagement, unserviceable foreign-denominated debt, war spending, or just plain old assuming that you can buy anything you desire with the printing press.

If the fed's job is to ensure the payment system works, and that system relies on the liquidity and risk-free nature of the government itself, does it really matter if the treasury has an account with the fed, and what that balance is?

My point was that the MMT tenet that tax money is "destroyed" is false.  In the real world, this money is simply spent back into circulation.  I'd assume that any conclusions that flowed from this and other erroneous MMT beliefs would also be similarly flawed.

They've given more clarity to the nature of the fed/treasury operations in one blog post than Austrians & Keynesians have been able to do in 40 years of arguing about fiat money.

With respect, this is how you would preach to the choir.  We sinners require a sermon with a little more meat.

Have you had a look at the list of basic criticisms I leveled at MMT?  These are very simple, fundamental, and ought to be easily answerable.

To expect the treasury to have to tax or issue bonds before it spends currency into existence is logically inconsistent.

This is another MMT "operational reality" that simply isn't true.  The Treasury doesn't "spend money into existence".  It spends by drawing down on the same account with the Federal Reserve that I already pointed out previously.  This account is packed with money received in tax payments and borrowed from purchasers of US debt.

[moda0306]

LW,

If you're stating that hyperinflation has to do with plenty of things, including but not limited to printing money, then I'm not overthinking anything... I'm agreeing with you.  It doesn't do us any good to draw conclusions based on one metric if we both agree others come very heavily into play.

If taxation ends up in an account that has NO BEARING on the gov'ts ability to spend, then yes, it is true, that taxation effectively destroys money.  Why?  Because the non-government sector is poorer in terms of financial assets (most of which could be considered money to some degree), but the government sector has been given absolutely nothing it doesn't have unlimited access to... numbers on a score board.  The fed won't ever let the gov't score get to zero, and most of the market realizes this.  It then does us little good to look at the government as playing the game like the other teams, but that the game is actually being played by everyone else with the gov't only serving as a scorekeeper... with the unfortunate fact that they have to mark themselves "deficit" points for every point they "issue," confusing most of the teams on the field.

If there's anything MMT/MMR isn't short on, it's "meaty" analysis.  I was just putting that in perspective.  I don't use too much hyperbole... I thought I was allowed a little.  I'd recommend reading some of the more wonkish posts at monetaryrealism.com.  If you want meat, it's there.  These aren't socialists or statists.  They just want to know how the sausage is made.  They skip over meaningless accounting identities for the greater function of looking how the system functions in unison.

The account the treasury has at the federal reserve couldn't even exist if our government didn't issue money.  It's an accounting identity that is there for tracking purposes only.  Our government is a currency issuer.  As such, its account at the fed is as irrelevent as what my right pocket owes my left pocket.  Bonds are simply an instrument that does not apply in traditional terms.  It draws down the irrelevant account by exchanging pure money for interest-bearing money, and the fed trades pure money for interest bearing money to make sure the account never reaches zero (among other things).  Now we can choose to either take the fed & treasury accounting identities at descriptive value, or we can look at the reality of the system as it functions as a whole.  The fed is accomodative to the treasury to the point where it fundamentally transforms what we effectively have, and HB pointed this out repeatedly, if in somewhat different terms.  The government issues money and savings instruments that are really another form of money.  Trying to conclude we're currency users simply because the system only loosely appears to function like it did when we were currency users is going to lead you to the wrong conclusions.  We might as well view the fed and treasury as one entity managing the monetary system, not because we WANT it exactly as it is, but because it truly defines the nature of both the constraints of our government, and the nature of the assets we hold as savers.

[moda0306]

LW,

I guess to maybe clarify our differences, I'd ask the following  questions:

Is the US government a currency-issuer?  If not, who is the issuer of the US dollar?  Since there is no convertibility to a commodity or foreign currency, is the US not completely sovereign in its role of issuing base us dollars? If you're trying to say the fed alone is simply the currency issuer, and they're beholden to the payments system stability, which is dependent on treasury liquidity, then aren't they really working in unison with the treasury?  Isn't this evident in HB's writings?  Doesn't that mean that the treasury really directs the flow of fiat assets into the economy, and the fed simply accomodates it?

What role do bonds play in this environment??... as the very nature of bonds is to give one party money temporarily that can't get it by some other means?  Why would a currency issuer need bonds if that's what are for?  Why would they maybe choose to issue bonds anyway, even if they're not needed?  Is a bond, especially if issued by a currency-issuer, not about the most similar thing to base issued money as you can possibly get, especially on the short end?  Since more and more financial assets are proving to be easier forms of money to use, isn't the driving issue not what the gov't gives us that it calls "money" vs "bonds," and moreso how much of either of these that we hold on our balance sheets as financial assets?

I know that's a lot, but it is confounding me how your logic can persist.  I have to imagine that we're arguing past each other to some degree.

[Storm]

LW, thank you for pointing out some intelligent "flaws" in Mosler's article.  Gumby, I would be very interested to hear your response to what seems to be conflicting information on the Fed's website:

The Treasury's Checking Account
Incoming federal government revenues are credited to the U.S. Treasury's accounts at Reserve Banks. Most of these revenues come from transfers of funds from depository institutions in which the Treasury initially deposited its receipts from taxes and the sale of securities. The transfers are accomplished by debiting the depository institutions' reserve balances with the Federal Reserve and crediting the Treasury's account with the Fed. Reserve Banks disburse money from the Treasury's account through EFT or ACH payments or, to a limited extent, by check.

The Treasury's Fiscal Agent
When its current expenses run ahead of its current cash resources, the Treasury borrows, mostly by auctioning government securities to investors. The auctions are held by the Federal Reserve Banks, acting as the Treasury's fiscal (financial) agents. The Fed also inscribes and delivers U.S. savings bonds sold through depository institutions and other issuing agents.

Source:  http://www.frbatlanta.org/pubs/frstruct ... ctions.cfm

This seems to contradict Mosler's assertion that tax revenues are simply deleted from bank balance sheets by the Fed, and it also contradicts his assertion that the government can spend whatever it likes, without borrowing first.

[murphy_p_t]

LW, thank you for pointing out some intelligent "flaws" in Mosler's article.  Gumby, I would be very interested to hear your response to what seems to be conflicting information on the Fed's website:

The Treasury's Checking Account
Incoming federal government revenues are credited to the U.S. Treasury's accounts at Reserve Banks. Most of these revenues come from transfers of funds from depository institutions in which the Treasury initially deposited its receipts from taxes and the sale of securities. The transfers are accomplished by debiting the depository institutions' reserve balances with the Federal Reserve and crediting the Treasury's account with the Fed. Reserve Banks disburse money from the Treasury's account through EFT or ACH payments or, to a limited extent, by check.

The Treasury's Fiscal Agent
When its current expenses run ahead of its current cash resources, the Treasury borrows, mostly by auctioning government securities to investors. The auctions are held by the Federal Reserve Banks, acting as the Treasury's fiscal (financial) agents. The Fed also inscribes and delivers U.S. savings bonds sold through depository institutions and other issuing agents.

Source:  http://www.frbatlanta.org/pubs/frstruct ... ctions.cfm

This seems to contradict Mosler's assertion that tax revenues are simply deleted from bank balance sheets by the Fed, and it also contradicts his assertion that the government can spend whatever it likes, without borrowing first.

Storm...I strongly agree in questioning this particular point...as it seems (from the amount I've read) that the whole of MMT hinges on this specific point.

[Lone Wolf]

If taxation ends up in an account that has NO BEARING on the gov'ts ability to spend, then yes, it is true, that taxation effectively destroys money.

As I've said (and the FRB Atlanta links in this thread point out), tax money flows into the Treasury's account at the Fed and then right back out into circulation, either as simple expenditures or interest payments on the debt.  There's no "destruction" here of any kind.

If MMT's supposed strength is that it lays out "how things actually work", it should not have to wave its hands about such a terribly basic operational fact.  What matters are literal operational realities not figurative ones that happen to grease the skids for some particular worldview.  MMT seems to usually provide the latter.

What role do bonds play in this environment??... as the very nature of bonds is to give one party money temporarily that can't get it by some other means?

Because one entity (the Fed) controls the printing presses and their charter does not permit them to directly finance the Treasury.  Thus, the government must finance deficit spending by selling debt at auction.

The Fed is set up as an (ostensibly) independent Central Bank.  This means that Congress does not have direct access to the Fed's electronic printing press.  Whether or not this disappoints MMT is irrelevant.  It's how things actually work, literally rather than figuratively.

How about taking a crack at my points?  If these objections occurred to you, please explain how you reasoned past them.  If they did not, think them over.  Try to see these points through a skeptic's eyes.

• MMT artificially differentiates between government bonds (liability of the taxpayer) and other forms of debt.  (Issuing debt is something any corporation or government can do.  The power of the printing press, which rests with the Federal Reserve, is the real superpower.)
• MMT claims that taxation "destroys" base money.  In actual fact, such money is almost immediately spent again in order make purchases or to service debt.  So much for "operational reality".
• MMT recommends tax increases in order to halt inflation, when in reality there is no demonstrable correlation between the tax rate and the rate of inflation.  (See: the 1970s.)
• MMT views ever-escalating levels of government debt as not only a good thing but a requirement for a healthy economy.  This is nothing more than conflating the supply of money (determined by the Federal Reserve) with the "supply" of government debt.  You don't need this much debt.  When Harry Browne literally booed deficits in the final episode of his radio show, he wasn't being ironic. 
• MMT blames the dot-com bust (which had very obvious real-world causes) on the "Clinton surpluses".  Why ignore the fundamental causes to make such a stretch?  No surplus (real or imagined) preceded the 1980 or 1990 recessions.  They had fundamental economic causes, too, but fail to fit the "evil surplus" narrative.

To this list I would also add the fact that "spending money into existence" of course does not actually happen except via the Federal Reserve.  As mentioned above, the Treasury receives taxes and pays out money via its account at the Fed.

[MediumTex]

The plot thickens...

I love these MMT discussions.

[6 Iron]

The plot thickens...

I love these MMT discussions.

This is meaty stuff. My biggest beef has been with the "deficits do not matter, except when they do, and we are not certain when that is, except it is not now" line of reasoning.

[moda0306]

Fellas, I'm apologizing for sloppy use of HTML in advance... LW...

As I've said (and the FRB Atlanta links in this thread point out), tax money flows into the Treasury's account at the Fed and then right back out into circulation, either as simple expenditures or interest payments on the debt.  There's no "destruction" here of any kind.

If MMT's supposed strength is that it lays out "how things actually work", it should not have to wave its hands about such a terribly basic operational fact.  What matters are literal operational realities not figurative ones that happen to grease the skids for some particular worldview.  MMT seems to usually provide the latter.

This is a huge point.  The treasury's account at the fed may seem like an "operational reality," but what MMT's whole point is that it is an accounting gimmick... why?  Because, in spite of the assumption that the fed is "independent," it is implicitly and explicitly tasked with ensuring that auctions don't fail.  Here's an excerpt from the MMR website:

The issuance of government bonds is merely a monetary tool that helps the Federal Reserve to control the overnight rate. It is not a fiscal financing tool. To understand this point we can review government bond auctions in the USA.  These auctions are carefully orchestrated events that are designed not to fail – that’s why they never do. The NY Fed describes the way in which their operations are intricately intertwined with the US Treasury:

“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.”?11

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 – the myth of Fed independence creates substantial confusion here). William McChesney Martin, the longest ever 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.“12

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 on to the US Treasury and work in close coordination with the government in everything they do. The myth of independence is intended to create the perception of no political bias. But do not be fooled – the Fed is very much a part of the US government.  They might maintain their political independence, but they are very much a part of the US government.

Continued... gettiong flopped around in my typing area....

[moda0306]

LW Quote:

•MMT artificially differentiates between government bonds (liability of the taxpayer) and other forms of debt.  (Issuing debt is something any corporation or government can do.  The power of the printing press, which rests with the Federal Reserve, is the real superpower.)

Moda response:

If the federal reserve must accomodate the treasury, then it's not as independent or as much the superpower we believe it to be.  Harry Browne, let's remember, realized this relationship.  The nature of this relationship is key.

LW Quote:

•MMT claims that taxation "destroys" base money.  In actual fact, such money is almost immediately spent again in order make purchases or to service debt.  So much for "operational reality".

Moda: An account with a number between two entities that are not in any way at arms length is no "operational reality."  The fed WILL accomodate treasury spending for the sake of the stability of the monetary system of the US... it will not allow the treasury to default, and it has member banks cooperating by law to assist in this.  It's all one tightly balled system that, when you connect the dots, you realize is designed not to fail.  Fed, treasury, and member banks, altogether, make the "treasury's account at the fed" balance irrelevant.  If the money is respent, MMT/MMR acknowledges that money has been issued.  I see no conflict here.  Taxation destroys money, and spending creates it... if taxation is less than spending, net currency is created.

•MMT recommends tax increases in order to halt inflation, when in reality there is no demonstrable correlation between the tax rate and the rate of inflation.  (See: the 1970s.)

Moda: This is one area I think MMR improves on MMT, as it gives a lot of credit to monetary operations and the horizontal (lending) money-creation aspect.  I will admit, I still feel like I have received subpar explanations of the 1970's... but I received some responses that I never dug into from some MMR guys, so I'll try to tap those and get back to you guys.

•MMT views ever-escalating levels of government debt as not only a good thing but a requirement for a healthy economy.  This is nothing more than conflating the supply of money (determined by the Federal Reserve) with the "supply" of government debt.  You don't need this much debt.  When Harry Browne literally booed deficits in the final episode of his radio show, he wasn't being ironic. 

Moda: HB had a phenominal understanding of the monetary system for his time, so I'm not going to try to go into battle with a man I respect that much... however, if a government is a currency issuer, and it uses two NON-independent entities to manage that status (the fed can call itself what it wants, but it is the treasury's lap-dog unless it feels like causing a monetary collapse).  In that type of arrangement, "debt" is really just another fiat asset that the government created out of thin air.  If one law says that the treasury MUST go into debt to spend, and another law says tha the fed MUST ensure a stable monetary system, the two combined effectively create a monetary system that accounting identities will never describe correctly as they exist today.

continued...

[moda0306]

LW: •MMT blames the dot-com bust (which had very obvious real-world causes) on the "Clinton surpluses".  Why ignore the fundamental causes to make such a stretch?  No surplus (real or imagined) preceded the 1980 or 1990 recessions.  They had fundamental economic causes, too, but fail to fit the "evil surplus" narrative.

Moda: LW, I'm glad you ended on this... because MMR tries to tone this down quite a bit.  MMR is much more nuanced in this area.  They basically say that MMT gives way too much credit to the vertical component of financial assets (base money and treasury bonds), and not enough to the nuances of the horizontal component.

MMR would say that the .com boom came as a result of simply mispricing of certain investment, and therefore an inappropriate rise of credit.... they believe that a lack of the proper amount of NFA's (net financial assets) exacerbated the recession (not nearly as much as it exacerbated the 2008 crash), but that the core problem was simply that people mispriced investment, and an adjustment occured.  Discussions on this have gotten intense and deep on that site, because half the time they're debating some of the more strong assertions of MMT.

[Gumby]

The Treasury's account at the Fed is really just a spreadsheet. In fact, all bank accounts are really spreadsheets. But, for argument purposes, we'll call it a real account. To be honest, it really doesn't matter. The reason why MMTers and MMRers say that the money is just "deleted" is because that's what's happening to the private sector's reserve accounts. Once that taxes money leaves the private sector (whether through deletion or transferring to the Treasury's account) makes no difference because the private sector doesn't have access to that base money anymore. It really makes no difference because it's deleted from the private sector (or transferred to an electronic account that isn't a part of the private sector). It would be like telling people that a stadium stores its points in a secret locker room. Whether its a spreadsheet or an "e-vault" or a room with pink bunnies running around or an "account" doesn't really matter. The point is that its a recorded deletion from the private sector.

But, let's be honest here... even if the Treasury had no money in its "account," Congress and the Treasury could still build an aircraft carrier whenever it wanted to. So, the balance of that account really doesn't matter from a solvency standpoint. If the Treasury's "bank account" (or spreadsheet) doesn't have enough money in it, the Treasury just prints up some bonds, auctions them off with no problems (thanks to help from Primary Dealers, who can even get short term loans from the Fed if necessary), and adds money to its account/spreadsheet at the Fed. And as that money enters the private sector, it becomes excess reserves that eventually get funneled into more Treasuries (thanks again to Primary Dealers). It can do this as much as it wants to. There is no solvency issue because the Fed and Treasury work together to target and drain reserves and move those reserves into risk-free Treasuries.

I could be wrong, but I suspect the reason why Lone Wolf hasn't been able to grasp MMT is because A) he's still applying gold-standard logic to our fiat monetary system, and B) he believes that the Treasury's bank account can be "funded" by all of the bank credit-money in the private sector. But, this isn't true. In a fractional reserve banking system, the only real "money" is base money — the rest of our money supply is just lines of private credit on sheets of paper. So, when you pay your taxes or buy government bonds at auction, the Fed has to transfer real base money from your bank's reserve account to the Treasury's account at the Fed. Only base money can be transferred into that account.

But here's the rub... base money only comes from two places.... it either comes from the Treasury printing up base money — and issuing corresponding government debt — or by the Fed swapping assets (usually Treasuries) with Primary Dealers. And since any base money that the Treasury spends into existence (through its Federal Reserve account) has to come from debt issuance, that means that our money supply is a debt-based monetary system:

http://en.wikipedia.org/wiki/Debt-based_monetary_system

So, our money is debt-based. That's a fact.

That means that the money we use to buy government bonds and pay taxes comes from debt-based base money.....which comes from government spending and issuing debt.

So, this notion that the government is "borrowing" from the private sector is just nonsense. All money is created from debt. And the government bonds themselves become currency in the private sector and fund our Permanent Portfolios.

Every Treasury bond issued just becomes an asset for the private sector. We are not any poorer when we purchase Treasuries. The Treasury doesn't borrow our money. We swap our base money for Treasuries and we gain risk-free savings. The cycle just keeps continuing as more base money is created and more debt is issued.

And one of the reasons the cycle must keep continuing is because the overwhelming majority of the private sector's lines of credit and interest payments must be settled with either new private credit or new base money — often necessitating new money that does not yet exist in the private sector. So, when the economy slows, the only way the private sector can prevent itself from defaulting on its own "private credit-based monetary system" is if new base money is created.

And where does base money come from? It either comes from the Treasury's debt-issuance or the Fed's asset swaps with Primary Dealers.

As I've said (and the FRB Atlanta links in this thread point out), tax money flows into the Treasury's account at the Fed and then right back out into circulation, either as simple expenditures or interest payments on the debt.

And where did the base money to pay the Treasury come from? It had to have come from debt issuance (or an asset swap with Primary Dealers), as I explained above. In other words, the money to pay taxes comes from government spending. There is no way to "fund" the government with money that didn't originally come from the government. You have to think about where base money comes from to get MMR.

[moda0306]

6 Iron: My biggest beef has been with the "deficits do not matter, except when they do, and we are not certain when that is, except it is not now" line of reasoning.

I think if I had to most accurately describe MMT/MMR in this area is not that they're saying deficits don't matter, but it's in context of something called "society's desire to net-save."  In a currency arena without government, saving can't occur without investment (this is based on accounting of real wealth in the private sector).  This is unstable, as investment relies on consistent enough demand to service its debt... and if society can't save unless investment occurs, and investment won't occur unless demand is near capacity, then we end up in one big Mexican standoff with our money.  Government NFA's can mitigate this by adding a cushion to the system that helps society function with more confidence, especially when times are tough, people are all trying to save, others are unemployed, and businesses are far under capacity.

I could try to describe more but monetaryrealism.com will do a better job.  Just try to dig into those posts and you'll see that there's a ton of logic & knowledge built around all of this.  

I'll add that while our overall debt might appear high, if you think about it, if we have to supply the world with dollars as the world's reserve currency, we have to run big deficits to give both them and us enough net savings to function in a stable way.  There was an interesting thread on here discussing the US military's role in protecting shipping lanes and its relation to the US dollar's acceptance ass currency overseas that further expanded on this in ways that probably serve to confuse more than we need on this topic right now... but they were interesting.

[hoost]

We have a debt-based monetary system. All of our money comes from debt.

http://www.moneyasdebt.net/

http://en.wikipedia.org/wiki/Debt-based_monetary_system

Therefore, debt is necessary for base money to exist. And private credit could not exist without base money. So, yeah... debt it necessary. But, that doesn't make it a good thing. Debt has negative consequences too. The only point MMT/MMRsts are making is that there is no issue of solvency.

All of our money does not come from debt.  If all of the debt that is currently carried on the fed's balance sheet went away, there would still be gold.

[Lone Wolf]

If the federal reserve must accomodate the treasury, then it's not as independent or as much the superpower we believe it to be.

The "accommodation" that the Treasury receives is only that its auction won't result in an embarrassing, catastrophic failure.  Someone will purchase their debt at some interest rate.  We all know this and it leaves my basic point unaddressed.

So I say again: "MMT artificially differentiates between government bonds (liability of the taxpayer) and other forms of debt.  (Issuing debt is something any corporation or government can do.  The power of the printing press, which rests with the Federal Reserve, is the real superpower.)"

Moda: An account with a number between two entities that are not in any way at arms length is no "operational reality."

Again, I'm still waiting to see operational proof that the Treasury "spends money into existence" or that taxes "extinguish money".  When I deposit my salary in my bank account / mattress do I "extinguish it from existence"?  When 45 seconds later, I spend this money on chaps, cheap booze, and 50-kilo gold bars, am I "spending it into existence"?

This model is the keystone of MMT.  If the theory has any validity at all it should be able to muster a robust defense of these ideas.

A fringe theory that boldly claims all mainstream economists, the general public, and pretty much anyone but themselves is uneducated must have its act together on basic operational matters.  MMT does not appear to have done this before declaring the whole world stupid.

Thanks for pointing out areas where "MMR" has improved on "MMT".  It sounds like they are making a legitimate effort MMT climb down from at least some of its absurdities.

[Storm]

All of our money does not come from debt.  If all of the debt that is currently carried on the fed's balance sheet went away, there would still be gold.

Hoost, I think it is far more accurate to say "if all of that gold that is currently carried on the fed's balance sheet went away, there would still be debt."  After 1970 gold was irrelevant to the fiat money system.