Friday, November 5, 2010


It's funny... When I started writing AlwaysLand (October 18th) I was perfectly happy with the standard assumptions I was relying on. But by the time I was getting ready to post it a week or so later, there were second thoughts. I looked at my assumption that says we need to have saved so there is money to borrow --

If we have a monstrous debt, then we must have done a lot of borrowing. So there must have been a lot of saving, which was loaned out to generate that debt.

-- and I thought, Well, the MMT people are gonna object to that! By then I had some of this in my head, from Scott Fullwiler:

But, the act of purchasing MBS and creating a deposit doesn't help a bank create money. Banks can already create as much as they want even without the Fed doing this.

Fullwiler seems to say there could be plenty of debt without any saving at all. So I was relieved when (in the first comment to AlwaysLand) Greg took my "a lot of saving" and matched it up to the national debt. Greg said something interesting, when I was expecting an argument. It worked out well.

During that intervening week, I obviously changed my thinking about MMT. No, I'm not buyin' that load'a crap... but I am starting to think it's not all crap. I'm getting past their bizarre claims, and I can finally notice some of their interesting observations.

What happened? I'm not sure. The Stephanie Kelton video [Session 2 video - part 1] came later, but captures a thought. About 90 seconds into her talk, Kelton says:

It's not a theory... What we have been describing to you today is not dependent on any ceteris paribus condition or any set of assumptions about perfect competition or rational agents or anything else that you get exposed to when you study economics, but rather an attempt to simply describe the way in which the institutional arrangements are set up, and the accounting identities and what happens...

I can see that: They're just describing "operational" realities. I think they're leaving out some practical realities. And I think they need a theory, a little Arthurian theory. And they reach conclusions I'll never get to. But observations are observations, and these guys are showing me a few things I've not seen before. I like that.

So, how did I get here? Winterspeak, I think. I followed Tschäff's link to Winterspeak and found something that made sense:

When the Government spends, and then taxes, it injects money into the private sector, and then withdraws it.

Nothin' to it, really. Government spending works just like the Fed's monetary control in a way, and just like anybody else: Either I'm spendin' my money or I'm sittin' on it. That makes so much more sense to me than this:

So the absolute fact of the matter is, the government never has nor doesn’t have dollars. It taxes by changing numbers down, but doesn’t get anything. It spends by changing numbers up and doesn’t use up anything.

Winterspeak put it in a way that made sense to me, and that has made all the difference.


jbpeebles said...

From Jim Rickards at King World News (link):

"The Fed is coming to resemble a highly leveraged hedge fund with an inverted pyramid of risky, volatile and junk debt balanced on a slim layer of capital. Recall the Fed owns the Maiden Lane portfolio of junk from Bear Stearns and $1.4 trillion of mortgages whose value is in serious doubt because of strategic defaults, lost notes and halted foreclosures. Treasury notes may be of good credit quality if you don’t mind getting paid back in debased dollars but even Treasury notes have market risk. If interest rates go up, the value of Treasury notes goes down; it’s that simple. The Fed is taking both credit risk and market risk on its balance sheet in unprecedented amounts.

Right now the Fed’s balance sheet shows about $57 billion in total capital. Current assets are about $2.3 trillion. The current money-printing plan will take total assets above $3 trillion. At that level, it only takes a 2% decline in asset values to wipe out the Fed’s capital. Put differently, it only takes a 2% drop in the average value of assets on the Fed’s balance sheet for the Fed to go bankrupt. And this is in an environment where various markets frequently go up and down 3% in a single day."

End quote...feel free to use this in a post and delete this comment -JBP

The Arthurian said...

Another excellent link, JB. I had to respond to it in a new post.

Hey John, remember when you said, I love your idea to use Fed money to pay off existing debt. Perhaps the best example would be paying off mortgage debt. ??

I think you're right to focus on mortgage debt.