Saturday, April 16, 2011

Tiptoe through the tulips...


"Last I heard," Mosler writes...

...Congress agreed cut $38 billion in spending from this year’s budget as a ‘down payment’ on reducing the federal deficit.

The proposals are now to get to work on more serious deficit reduction- maybe $5 trillion over the next 10 years, or about $500 billion or so per year.

In other words, maybe 10 years of negative growth, unless private sector (including non residents) spending somehow increases at least by that much.

For domestic sector spending to increase to fill what my mate Bill Mitchell likes to call the spending gap, there would need to be an increase in private sector debt (which is likewise measured as a drop in private sector savings).

So far, so good. But so far this is only a news report, plus one small bit of theory, the sectoral balances bit, the one little bit of MMT that makes sense to me and that I have already adopted.

The money has to come from somewhere. If not from government, then from us. So, Mosler says, it must come out of savings. That, or the money will not come, and the economy will continue to fall.

Makes sense to me, what Mosler says above. But then, this:

With today’s credit conditions, I don’t see where that could possibly come from. Borrowing to spend on houses and cars- the traditional engine of consumer growth- rising to levels sufficient to close the output gap seems highly unlikely.

Agreed. But let me not assume too much. What does Mosler mean by "today's credit conditions"? I think he means (1) conditions since the financial crisis. But maybe he means (2) we rely excessively on credit.

But (2) is not so much "today" as it is "the way we do things". (2) is always the one that concerns me. (2) is the one that must change if we are to solve the economic problem. Maybe Mosler means (2), but I don't think so, because to me it seems that nobody else ever says the things that I say. So I think Mosler means (1).

If Mosler means (1) conditions since the financial crisis, then he's not looking at the big picture. He's only looking at the mess we ended up with after we broke the economy. He's not looking at the things we did that broke it. He's not looking at the excessive reliance on credit.

Anyway, he's talking about the chances of restoring the economy by "borrowing to spend on houses and cars- the traditional engine of consumer growth." He does say the chances are not good that this will work. But it's not a thing I even consider, because it is the "traditional engine" -- because it is the way we do things.

The way we do things is what got us into this mess. The way we do things is the thing that has to change. I'm not talking about going back to horse-and-buggy days. I'm talking about reducing our reliance on credit.

So why is this happening? Why are we drinking the hemlock?

Because both sides- Democrats and Republicans- have it all dead wrong.

They both agree the federal deficit is too large and is a dire threat to our well being.

When, in fact, the exact opposite is the case- the output gap/unemployment is telling us- screaming at us- that the federal deficit is too small...

See, now I don't agree with this. First of all, it isn't government debt that's the problem. The problem, the big problem, is private debt. Anyway, Mosler is positioning himself in direct opposition to basically everybody. "The federal deficit is too small." Who says that? Nobody says that. Only the tulips.


If you look at the history of it, private-sector debt has been growing relentlessly since the end of the Second World War.

That is the problem.

Mosler's solution is to achieve some kind of balance between public and private debt by increasing public-sector debt. I think that's just silly: The problem is not that public-sector debt is too low. The problem is that private-sector debt is too high.

Still, Mosler's plan should restore balance. But Reagan already tried it. Reagan tried increasing the federal debt, and it didn't work so well. It didn't work because as soon as the public debt increases, the money that was put into the economy that way gets churned up into 35 times as much private-sector debt.

If we are successful in restoring growth that way, the churn number will go up to 40.

During the Great Depression FDR did something like what Mosler wants to do, increasing the public debt. It worked for FDR because the economy had already tanked and private-sector debt was dropping. (Yes, that's happening now; but that's what Bernanke is trying to stop.) The only reason FDR's public-debt increase worked was that the private-sector mechanism had failed, and new money didn't get immediately churned into oppressively high levels of private-sector debt.

I don't like the idea of trying to solve the excessive-private-debt problem by increasing the level of public-sector debt. If the problem is too much debt, then the problem is too much debt. The solution is to reduce debt, to reduce the big debt: to reduce private-sector debt.

If this can be done without increasing public debt, so much the better.

16 comments:

Greg said...

I think you might be missing Moslers point. He is guilty, at this point, of talking in terms of current financial arrangements and not necessarily in terms of what he would say are IDEAL financial arrangements.
Here is what I mean; currently we are required to issue debt for all level of federal spending over and above tax collection.... the deficit. This is a political, self imposed constraint that is not necessary.... in the sense that having freon or some other coolant is necessary to the operation of an air conditioner. We COULD just agree to leave that deficit "un debt-ified" and the only thing that would change is that somewhere someone would not get a T Bill to put in their account.

So Mosler is talking in terms of how we currently "must" increase our debt whenever we spend. He completely understands, and prefers, that we just have the govt spend, which would simply put more "money" (in the sense that you use the word money on your blog) in the peoples hands (income) so they can pay down current debts and maybe even save a little.

Todays credit conditions simply means, the borrowers have no income out of which they can reliably believe they can service any more bank debt.
Remember that MMT "knows" that credit conditions are not at the control of the Fed Reserve or private banks, they are at the control of the consumers or loan seekers. We dictate credit conditions by how much income we have. If we dont have any or it is felt it will be falling, we will NOT seek to borrow more (quite rational).

People without steady sources of income become poor bank loan seekers. That is the source of deteriorating credit conditions. Banks can offer all the gimmicks they want but unless they say "Oh and you dont have to pay the loan back!!" They arent going to findmany takers in this current environment.

The Arthurian said...

Thanks, Greg. You know, I think you are getting better and better at expressing your views (and at understanding mine). I have a qualm with this, however:
We COULD just agree to leave that deficit "un debt-ified" ...
Milton somebody-or-other (I won't mention the name...) talked of "monetizing the debt" which meant Treasury would sell TBills to somebody, and the Fed would buy TBills from somebody, so that the net public-sector transaction was like Treasury selling directly to the Fed. Sure, by this method the number of TBills increases. But the number held outside the public sector is unchanged. And the Fed turns over interest payments to Treasury... So isn't that essentially the same as leaving the deficit "un debt-ified" ? So, we CAN do that. We are NOT "required to issue debt for all levels of federal spending over and above tax collection," at least as I see it we're not.

As an observation on the above, this process of monetizing the debt leaves the government with more money to put into circulation, without increasing debt in any way that matters. So monetizing the debt is a way to reduce Debt-per-Dollar, which I hold necessary.

Todays credit conditions simply means, the borrowers have no income out of which they can reliably believe they can service any more bank debt.

So, that would be my (1) "since the financial crisis" and (2) we can't take on "more" bank debt because of excessive reliance on credit, EROC. Okay. So how is Mosler going to reduce the reliance on credit? I want to accelerate the repayment of private-sector debt. What does Warren do?

There is machinery in place, developed since the 1970s and now highly sophisticated, that can turn one new dollar of money into $35 new dollars of debt. We have to hinder that machinery so that it produces less and less new debt from a dollar. Then and only then will we be able to increase the number of new dollars without having to deal with inflation.

Greg said...

Monetizing the debt is different from what I'm describing. QE 1 and 2 would more accurately be called monetizing the debt because they took debt instruments (CDOs and MBS in QE1, Long term treasuries in QE2) and payed cash for them. They essentially traded money with interest for just plain money.

What I'm describing is simply money creation with no offsetting debt creation.

When the govt spends, "new" money is added (no debt yet) then someone else takes some of their money and ties it up in a T Bill. This T Bill is supposed to be the same as the level of original spending. This is the $4$ debt issuance that is supposed to accompany govt spending.

I think this ....

" So monetizing the debt is a way to reduce Debt-per-Dollar, which I hold necessary."

isnt quite right. When you have used debt per dollar in the past you were referring to the amount of private sector debt per dollar, not govt debt. They shouldnt be used interchangeably because like I pointed out before, I'll trade my $100,000 mortgage (private or bank debt) for a $100,000 T Bill (govt debt) any day of the week. I can use the interest from the T Bill to pay my car payment to the bank.

Warren would reduce the reliance on private sector credit by A) eliminating current payroll taxes and simply guaranteeing a level of payment from the govt to everyone over 65 (how much they get can be formulated any manner of different ways) B)guaranteeing a job for anyone who WANTS one (they will not be required to work). If people had more take home pay they wouldnt rely as much on credit and if they knew work was always available in some form, there would be fewer defaults, lowering the cost of credit and lowering interest rates, which would reduce the drag on growth you've so thoroughly documented.

The Arthurian said...

From my post: "...one little bit of MMT ... that I have already adopted."

From your comment: "... which would reduce the drag on growth you've so thoroughly documented."

See how good this is working out :)

//

"Here is what I mean; currently we are required to issue debt for all level of federal spending over and above tax collection.... the deficit. This is a political, self imposed constraint that is not necessary.... We COULD just agree to leave that deficit 'un debt-ified' ..."
And again:
"What I'm describing is simply money creation with no offsetting debt creation."

But what about the dual-entry accounting thing? Since money is an asset, there must also be a matching liability, right? You can't just print money and spend it without having matching gold or matching debt or big stone wheels or something, right? Is this new debtless money just completely unaccounted for? How does accounting-based economics resolve that?

Greg said...

It would be accounted for by a bigger and bigger minus sign on the Govt/Treasury/Fed side (currency issuer) of the balance sheet. The minus sign would be there as a record that the money was issued/created/spent INTO the private sector.

As Mosler is fond of saying, the government scoreboard can register a negative number as big as it likes, it never runs out of digits. Now, as big as it likes includes NOT liking unemployment OR price instability so there is a balance between having a number big enough to eliminate unemployment without causing runaway inflation. But you dont look or care about the size of the number only the real variable (employment and inflation) that the number influences.

One must remember too that the negative number never NEEDS to be made positive or even less negative. This is not like a bank that must get its loans paid back in order to maintain capital levels and stay in business.

The size of the minus sign would be equal to the size of the plus sign of the currency users (we the people) and would reflect the desires of the people to save dollars.

Thats the dual entry;

Govt -$ x million
People +$ x million

And in this case, unlike the bank loan scenario I described the govt could telll you "And this loan?... It never needs to be paid back..... just use it on something productive.... educate your children, get that operation so you can return to work, find daycare so both you and your husband can work, pay off that credit card debt if you wish... dont just blow it on cigarettes and beer"

As Cullen Roche says "the only thinking backing our $US is about 20 trillion of goods and services produced each year,,,,, but thats pretty substantial".

The Arthurian said...

"As Cullen Roche says "the only thinking backing our $US is about 20 trillion of goods and services produced each year,,,,, but thats pretty substantial"."

Yeah, I get that from (your favorite guy) Milton Friedman.

After my earlier comment I looked up the Kucinich bill to replace the Fed. (From last fall, I don't know where it stands now.) Kucinich wants to eliminate the requirement to create debt in order to create money.

I can't imagine what people think of this, people who think we have fiat money now! Even me, it strikes me as monopoly money. "Need it? Print it."

I think that one of the things that makes people cling to dollars is that they can earn interest on them. Government securities are the world's favorite safe haven. I'm not sure how that would stand up under a "Need It Print It" policy.

But, back to your first paragraph:
"It would be accounted for by a bigger and bigger minus sign on the Govt/Treasury/Fed side (currency issuer) of the balance sheet. The minus sign would be there as a record that the money was issued/created/spent INTO the private sector."

A figurative balance sheet? Or a real one? I am perfectly aware, too, that "the negative number never NEEDS to be made positive or even less negative," and that is okay with me (at least until after the real problem is fixed).

But go back to what I said above, about Milton Friedman's version of monetization of debt. If the Treasury issues debt and the Fed buys it and the Treasury makes interest payments and the Fed turns the income over to Treasury, isn't that a practical version of your figurative balance sheet?

Greg said...

Let me ask you this.

Why are you uncomfortable with the country printing money but not printing bonds?

A bond is just money + interest payment. It is still increasing the amount of money in circulation.

Only three ways to get more "spending power" in circulation;

1) The govt creates money and buys something with it.
2) The govt creates money buys something with it AND later takes someone elses money and creates a bond for them
3) A bank creates a loan and you promise to pay it back (with money + interest)

I say do 1 when the govt spends and continue to do 3 as long as credit issuing faciities are properly capitalized and regulated.

We can continue to do 2 provided we stop screaming about the debt level.

That thing that Friedman described is just kabuki theater pretending to be serious finance. We need to stop massaging peoples myths about what money is.
Modern money in every society worth living in is a state created entity and the state of the state determines the state of the money

Money has ALWAYS been created from thin air and its NOT a commodity its that which commodities are priced with, the numeraire.

The Arthurian said...

Why are you uncomfortable with the country printing money but not printing bonds? A bond is just money + interest payment. It is still increasing the amount of money in circulation.

I am aware that "a bond is just money + interest payment" is part of the MMT argument arsenal. But I don't see it that way. If I were to issue a bond it would be TO GET money. Or I could sell widgets to get money; but neither widgets nor bonds ARE money.

If you like, a bond today is money tomorrow. But that is not the same thing as money today. The thing that I am uncomfortable with is flawed definition.

If Treasury sells a bond to the private sector, it takes sedentary money from the private sector, and by spending re-issues that money to the private sector as circulating money. Circulating money is the money people spend everyday. Sedentary money is money people don't have to spend, perhaps because they have more than they need. Deficit spending as a policy is based on the concept that the conversion of sedentary money to circulating money is sufficiently necessary to be worth the cost.

A bond moves money from savings to circulation. So I agree, it increases money in circulation. It does so without increasing the total (circulating + sedentary) money supply.

Money has ALWAYS been created from thin air and its NOT a commodity its that which commodities are priced with, the numeraire.

The Cullen Roche & Milton Friedman concept -- that the production of output is what gives value to money -- depends on the notion that the value-of-money is determined in the same way as the value-of-commodities: that value and scarcity are inversely related.

Greg said...

This is a good discussion Art, I can now see where we are diverging. Now, to figure out WHY we are diverging?

" I am aware that "a bond is just money + interest payment" is part of the MMT argument arsenal. But I don't see it that way. If I were to issue a bond it would be TO GET money. Or I could sell widgets to get money; but neither widgets nor bonds ARE money"

I think you are forgetting the relationship the govt has as bond issuer and the relationship YOU would have as bond issuer. You would be more like a company. Companies issue bonds all the time,to raise money but they are fundamentally different from a Treasury Bond. A Treasury bond could very easily be used as collateral to go to a bank and get a loan for the face value. Give the bank the bond and they give you "money". A govt bond is a very negligible step away from money, as you use the term.




" If you like, a bond today is money tomorrow. But that is not the same thing as money today. The thing that I am uncomfortable with is flawed definition."

It could be money any time by taking it to a bank. Just because a store wont accept it for payment of something doesnt make it "not money"


" If Treasury sells a bond to the private sector, it takes sedentary money from the private sector, and by spending re-issues that money to the private sector as circulating money. Circulating money is the money people spend everyday. Sedentary money is money people don't have to spend, perhaps because they have more than they need. Deficit spending as a policy is based on the concept that the conversion of sedentary money to circulating money is sufficiently necessary to be worth the cost."

I see sedentary money is simply "savings". Savings in something other than gold, a stock, a house or land.
But your first sentence gets the operation backwards. This is something that MMT authors have studied extensively. The spending happens FIRST and then the bonds get issued, thats why the amount of money increased. If they simply took existing money made a bond then spent it, there would be zero increase in the money supply. It would be a horizontal transaction just like me lending you 20$

" A bond moves money from savings to circulation. So I agree, it increases money in circulation. It does so without increasing the total (circulating + sedentary) money supply."

Thats not correct, as I understand it. When the govt spends total money supply increases, then a bond is issued because someone decides they want to save. SO the bond issuance moves money from circulating (to use your term) to sedentary. A bond is a savings account with rules and circulating money is a checking account.


Only the govt can add money to the economy. And only the govt can remove it via taxation. Banks simply issue loans which always have offsetting debits and credits.

The deficit is the level of net addition.

Stephanie Kelton described it well here:

http://neweconomicperspectives.blogspot.com/2010/11/yes-government-bonds-add-to-private.html

The Arthurian said...

I'm with you on this:
"Only the govt can add money to the economy. And only the govt can remove it via taxation. Banks simply issue loans which always have offsetting debits and credits."

It makes perfect sense to me and helps explain what I see in my graphs. Also I find most interesting the idea that only the government can add money to the economy, because only the government is not in the economy, not part of the economy... If this is said correctly, it can be satisfying to Tea Party people I think. It's an access point, I think. (When we say we want "the economy" to grow, we mean we want "the private sector" to grow!)

Other than that, I have to sleep on it.

Greg said...

When I said that a bond is a very negligible step away from money, how I think that should be technically stated is that money is more liquid than a bond.
In the case of govt bonds it is only slightly.

Mosler likes to say a bond is like a savings acct or CD where as cash generates no interest. BUT whatever is in the CD was previously in a cash account.


I really like your second paragraph, because it defines the proper relationship and emphasizes the synergistic relationship that CAN exist if a govt is managed properly. In regards to money a central bank/Treas should add valuable stability to an economy by never allowing payment systems to freeze up and by never letting necessary functions run short of cash due to changing "liquidity preferences" elsewhere.

The Arthurian said...

Yeah, "liquidity." I was going to say that.

You quoted me: " If you like, a bond today is money tomorrow. But that is not the same thing as money today."
And you replied: It could be money any time by taking it to a bank. Just because a store wont accept it for payment of something doesnt make it "not money"
I think, yeah it does make it "not money." It makes it "near money" or something. If you say a bond is money because it can be converted into (what I think of as) money, then I say my widgets are also money because I can convert them into money at any time by selling them. I think we are on thin ice here. I don't know what's wrong with this discussion, but something surely is.

You say: "But your first sentence gets the operation backwards. This is something that MMT authors have studied extensively. The spending happens FIRST and then the bonds get issued, thats why the amount of money increased. If they simply took existing money made a bond then spent it, there would be zero increase in the money supply."

I don't follow. The Q of M increases because the Fed bought something, or else because of some sort of fractional reserve thing. And I don't see that the order of events makes a lot of difference, especially if the second step ("the bonds get issued") happens very soon after the first step.

You say: "Only the govt can add money to the economy. And only the govt can remove it via taxation. Banks simply issue loans which always have offsetting debits and credits. The deficit is the level of net addition."

I think the... Granted, I have not looked into this like MMT economists have, but: I think that the government's monetary operations are just like monetary operations in the private sector. Except the government is not part of the private economy, so when (for example) the Fed "has" money, that money is "out" of the economy, and when the federal government has debt, that debt is "out" of the economy. This (I think) is really the only way your MMT guys can get an increase in their "net financial assets" -- by defining the federal deficit as "out" of the economy.

Your "vertical" relationship, or whatever.

Greg, we think much alike. Our terminologies differ more than our views, I am sure of it.

Greg said...

I agree that we think mostly alike and use different vocabulary but I must disagree with this

" I think, yeah it does make it "not money." It makes it "near money" or something. If you say a bond is money because it can be converted into (what I think of as) money, then I say my widgets are also money because I can convert them into money at any time by selling them"


A bond, govt bond, has a face value. A widget has a price. Yes you can convert your widget to money but can you guarantee a price? No way. It is worth different things to different people. A $1000 bond IS a $1000..... PLUS an interest rate. You can guarantee $1000 for it and haggle over the price of the remaining interest. It will never be less than $1000. A bond is money PLUS!


Let me try a different tack with my comment about the timing of the bond issuance and its relevance;

Lets take a point in time A and look at the financial assets, specifically dollars assets. There is 1000$ under beds, $1000 in checking accounts, $1000 in savings accounts/money market and there is $1000 in govt bonds. Yes there are offsetting debts to be paid but we will ignore those for now and look just at money in the economy. Stock accounts arent money they are assets with a price like a widget or house. The private sector has $4000 + some interest on the govt bonds.

At point B the govt spends $100 ,so the private sector now has $4100. $1100 in checking and everything else the same. Because of fiscal rules the govt is required to sell $100 of debt to "finance" that spending. SO...... someone somewhere uses their checking account money to buy a govt bond and now its $4100 with $1100 in the govt bonds. All that happened was the $1100 balance in checking became an $1100 balance in govt bond account. The private sector is $100 "richer" because of the govt spending, which occured before the bond was issued. There is no other way for the private sector to have additional money to buy a new bond til the govt creates it. I hope this is clear. This is pretty standard stuff and I think you know this already but maybe havent put it together in this manner. You are obviously clear about govts place outside the private sector and its role as "money injector- in chief".


The govts money operations are 180deg from the private sector in at least one very important fashion. When the private sector issues debt it is counting on it being paid back. When the public sector issues debt, it first gives you the money to purchase it.... then it agrees to give you interest on top of it...... what a deal!

The Arthurian said...
This comment has been removed by the author.
The Arthurian said...

Let me re-phrase that. I didn't tip-toe very carefully there.

A $1000 bond IS a $1000..... PLUS an interest rate. You can guarantee $1000 for it and haggle over the price of the remaining interest.

Without looking up anything to verify what I think I know, let me just state it: The dividend paid on stock varies, but the interest paid on a bond is fixed. The way bond interest rates vary is, the bond price itself varies.
Okay, this is in the aftermarket, and the government still promises to pay $1000. But not at any time; only when the bond is "due". So a bond today is money tomorrow.

Whew! I almost talked myself into agreeing with you.

A big part of the trouble I have with MMT is that it works backwards from what I know (like: the money is spent first, and the bond is issued later). So it is like a language that I cannot think in.

But yeah, when the bond is due the government must either add $1000 to private-sector money, or issue another bond.

Another trouble I have with MMT, and other people too, is they want to lump things together when I want to distinguish one from another. Basic, clear, simple definitions are the most important thing. I still don't see that money and government bonds are the same. Sure I can take my $1000 bond to the bank and get money for it -- perhaps I could get $1200, depending on what happened to interest rates -- but that's just selling the bond.

Anyway, I don't see what is the advantage of saying a bond is money.

"All that happened was the $1100 balance in checking became an $1100 balance in govt bond account."

Remove the word "account" there at the end and make "bond" plural... Otherwise you are thinking of bonds as a savings account. Bonds are bonds, which are a form of savings, different in no significant way perhaps from a savings account, but for me it adds... for me it makes the statement wrong. Bonds are bonds. If you want to explain to me that bonds are LIKE a saving account, to help me understand the concept, that's fine. Otherwise it is the kind of argument that I object to in Mosler's writing. Call it what it is. Don't call it something different. That doesn't simplify anything. We could simplify the discussion by not talking about "bonds" at all, just "debt" and "credit" (no matter what form they take).

"The private sector is $100 "richer" because of the govt spending, which occurred before the bond was issued. There is no other way for the private sector to have additional money to buy a new bond til the govt creates it. I hope this is clear."

Not clear at all... Maybe the guy who bought the bond bought it instead of buying my widgets. Maybe money shifted out of the productive sector and into finance. Maybe it's not "additional" money, but existing money that went in a different direction.

The purpose of selling a bond is not simply to make someone richer. The purpose is to take sedentary money and circulate it.

Piet Poet said...

I quoted this post at the 11 month old vid i just posted to an older post of yours, here:
http://newarthurianeconomics.blogspot.nl/2010/10/im-61.html

he did post an unanswered .. but sorta 'empty' comment on your blog around that time ... anything more serious come of it?

i been thinking of tax earmarkability as the way forward out of the suffocating cults all institutions are becoming without such fundamental choices.