Wednesday, November 10, 2010

Art says... (graphic form)



8 comments:

Greg said...

Art

Guess who came and left a little comment on my blog?

He left it in my first ever blog post that I did about my travels through the MMT world.

This is all he left;

: )

I LOLd

The Arthurian said...

And I LOLd, reading that!

I have to read more of Mosler's stuff from a time before he was running for office.

Art

Greg said...

Did you ever watch the youtube of his interview with the newspaper in Connecticut. He does a nice job of summarizing a the major operational points as well as pointing to possible policy options.

Go to youtube and type in "Warren Mosler part 1"

each successive part will show up in the right margin.
There is 5 parts in total about 75 minutes.

Tschäff said...

Art,

One thing you have to understand is that M1 can come from many sources.

For example if a bank makes a loan that goes into a checking account, ceteris paribus M1 increases, or the reverse, if a loan is repaid M1 decreases. Deposits are liabilities on the bank's balance sheet. If the government buys a treasury bond from the non-bank non-government sector M1 could increase.

I saw you were looking for something else besides MMTers that say a bank makes a loan which creates a deposit. Any banker involved with bank asset management can tell you that they make a loan and then using a complex two-week backward looking calculation find the reserves by "settlement Wednesday." Most banks as a business plan try to attract deposits from other banks because it is a cheaper source of funds than borrowing at the the fed funds rate or discount rate. If banks expand credit as a collective causing there to be more demand than supply of reserves (and assuming government spending does't add reserves), the price of reserves increases (the interest rate). The Fed has an overnight interest rate target (Fed Fund's Rate) it is committed to achieving so it will need to inject reserves defensively (usually by purchasing tsy secs) to hit it's overnight target rate.

You can see the Federal Reserve paper that says as much:
"..if the quantity of reserves is relevant for the transmission of monetary policy, a different mechanism must be found. The argument against the textbook money multiplier is not new. For example, Bernanke and Blinder (1988) and Kashyap and Stein (1995) note that the bank lending channel is not operative if banks have access to external sources of funding."

http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

Or Nobel Prize winner James Tobin:
http://sparc5.blogspot.com/2010/04/edward-s-shaw-in-1960-knew-that-loans.html

The Arthurian said...

Greg, I sure did watch that one. I'm just a slow learner, that's all...

Tschäff, let me split your comment into 2 pieces and set the bigger part aside for now. Now I want to go over just your first two paragraphs.

"If a bank makes a loan that goes into a checking account, ceteris paribus M1 increases."

Sure, but in that case debt also increases. Therefore, nothing good happens on my "debt per dollar" graph.

It may be that your MMT is right, and M0 has to increase (I think that's what you are saying). However, Bernanke has been increasing M0 for quite a while now. It doesn't help, because people don't spend M0. People spend M1.

The only way I can think of to reduce debt-per-dollar is to shift business costs out of the financial sector and into labor.

As the DPD graph shows, it is possible to reduce debt-per-dollar. It was done during the FDR years; probably increased government spending was the method. And it was done under Reagan (a very little bit) and again under Clinton.

I depend on guys like you to figure out what all this means... But I have complete confidence that my graphs show the development of the problem, and therefore show what must be done to fix the problem.

I think that my evidence supports at least part of your argument.

Tschäff said...

"If a bank makes a loan that goes into a checking account, ceteris paribus M1 increases."

Sure, but in that case debt also increases. Therefore, nothing good happens on my "debt per dollar" graph.


In that case private debt increases. Your graph shows that increasingly over a number of years
most deposits were caused by private debt, I think.

It may be that your MMT is right, and M0 has to increase (I think that's what you are saying).

What MMTers say is that the federal deficit needs to be larger. Simply swapping tsy secs for M0 doesn't change net financial assets, it just changes the term structure of government debt. When the treasury issues a check, the recipient deposits it into their account. The bank has a new liability, the deposit (could be M1), and once the check clears, the government adds reserves (M0) to the recipient's bank's reserve account at the Fed. Remember what a few people on Winterspeak's site said. Reserves are used for meeting reserve requirements and settling payments. That's it, they aren't loaned out.

However, Bernanke has been increasing M0 for quite a while now. It doesn't help, because people don't spend M0. People spend M1.

Bingo. The Fed sets interest rates. It's fiscal policy that dos the helicopter drops of new money (the national deficit).


The only way I can think of to reduce debt-per-dollar is to shift business costs out of the financial sector and into labor.

The only way the non-government sectors can de-leverage is if the government is adding to the income stream.

As the DPD graph shows, it is possible to reduce debt-per-dollar. It was done during the FDR years; probably increased government spending was the method. And it was done under Reagan (a very little bit) and again under Clinton.

Yup, government debt/GDP spiked during FDR to its highest historical levels. By the end of WWII, the combination of persoanl defaults and government debt left the non-government sectors with virtually no private debt.

Tschäff said...

I don't think the M1-M3 measurements are very useful, I wouldn't say M1 is the only thing that can be spent, just the most liquid asset. I need to think more about that.

Warren Mosler says, the government’s deficit is the “M” in the quantity theory of money P*Q=M*V, while the net savings desires of private sector are the inverse of the “V” in the equation.

Tschäff said...

Ok, I've thought about it. I knew it didn't sound right.

Say a bank creates a mortgage for $500,000 and the seller of the home has that money deposited in their account. It doesn't show up in M1 or M2 because it is over $100,000.