John Carney Gets QE Right

John Carney has really boned up on his MMT and MMR in recent months so it’s not surprising to see him get QE right.  In other words, QE is not “money printing”, but rather a tax increase that removes interest income from the private sector and reduces the size of the federal deficit by the amount disbursed from the Fed to the US Treasury.  John explains:

In the last of his four lectures to students at George Washington University, Ben Bernanke explained how the Fed’s quantitative easing programs worked. As it turns out, they were akin to a tax hike.

This aspect of government asset purchase-and-resale-for-profit programs is not well understood. I explained it in terms of a Treasury program last week.

A tax takes dollars out of the private sector, leaving households and businesses with fewer dollars and the government with more dollars. When the government buys something for $10 and sells it back to the private sector for $12, the net effect is the same as if the government had taxed away those $2.

Bernanke doesn’t come out and call quantitative easing a tax. But he comes close.

“The Fed’s asset purchases are not government spending, because the assets the Fed acquired will ultimately be sold back into the market. Indeed, the Fed has made money on its purchases so far, transferring about $200 billion to the Treasury from 2009 through 2011, money that benefited taxpayers by reducing the federal deficit,” he explains in one of the prepared slides.

Here’s a good rule of thumb. If something reduces the federal deficit, it is either the equivalent of a spending cut or a tax hike.

About

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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57 Comments on "John Carney Gets QE Right"

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Erik V
5 years 2 months ago

How about a post addressing this post on banking from Krugman? He tries to take on the MMT/MMR position without actually saying it. He thinks banks are reserve constrained, apparently by the odd reasoning that people can withdraw deposits as currency. He then says that people are indifferent between various forms of zero interest govt liabilities in a liquidity trap, but wouldn’t they be even less inclined to hold currency if rates on deposits rose? Horrible reasoning from PK here.

http://krugman.blogs.nytimes.com/2012/03/30/banking-mysticism-continued/#postComment

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KainIIIC
5 years 2 months ago

He also has triple-downed on the Loanable Funds model of banking, rather than the demand-driven endogenous model that MMT/MMR/Post-Keynesians like Steve Keen believe in. It’s kind of sad, he seems to be relying on circular logic and referring to his neo-classical textbook for back-up when his commenters are trying to explain that the textbook is wrong.

Or maybe he has evolved on issues such as debt-solvency and has come close to taking the MMR/Post-Keynesian perspective on banks, but is not quite there yet. He should really talk to bankers to see how they create money.

Guest
5 years 2 months ago

Great discussion here. John Carney’s evolution has been fascinating to watch, and refreshing to see somebody with a mainstream platform increase his MMT/MMR knowledge, though non-mainstreamers have been doing it for awhile

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Robert Rice
5 years 2 months ago

The comments about a debt ceiling were made by someone else. There is nevertheless a more general, less time specific political constraint, namely an irrational fear of inflation. If we as a populace didn’t believe the Treasury would cause inflation by printing money (there is a false belief amongst many if not a majority that money creation intrinsically causes inflation…), then QE wouldn’t be needed to create NFAs to skirt around that fear.

My comments back in February really contain two arguments; an operational one explaining how QE is a part of a process which creates NFAs, and a second on why those operations have been used. The operational argument is solid IMO, but the motive for using those operations (I’ve suggested it may be because of the political environment over the last few years) isn’t necessarily the end all be all. I’m all ears if someone has a proposal on an alternative motivation. Regardless of one’s opinion on my second argument, the operational argument is IMO without error.

Honestly I think this perspective of mine is unique. I don’t mention that for the sake of gaining noteriety or rockstar status if I happen to be correct, but to hopefully motivate some MMters or MMRers to read and consider the argument seriously. I haven’t seen it anywhere else, so do please consider it.

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Robert Rice
5 years 2 months ago

… this is directed at your comments Cullen. I’m not sure why it posted independent of the thread, so please delete it as I will repost it as part of the thread for organizational clarity.

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Robert Rice
5 years 2 months ago

I hate to say it, but I think MMT & MMR have it wrong on QE in terms of the creation of NFAs (which is in effect money printing). QE is part of a process; it is one of three asset swaps which leads eventually to the creation of NFAs. It’s the Federal government’s way to create money without having to have the Treasury do it directly. In so doing, they skirt around the political constraint the government faces, as it would be entirely unpopular for the Treasury to openly print to fund the needed deficit. I think you gentlemen almost have it right, but you’re missing the bigger picture. I explained this in detail back in February here on this site, and no substantive rebuttal was presented at the time. You’ll find my comments in this thread:

http://monetaryrealism.com/washington-post-dives-deep-into-mmt/

If you fixate on QE in isolation (the trees), you’ll miss the bigger picture (the forest). I hope the above helps us see the forest. We need it. I was just watching CNN last night, and the liberals have already acquiesced to defeat by accepting the terms of the debate with the conversatives, i.e. that the U.S. is in a debt crisis. We do not have a debt crisis, we have a lack of sufficient money in the domestic sector crisis if anything. We have too small of a deficit crisis in anything. The politicians are going to hurt our economy with Ryan’s budget or some hybrid of it.

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Dan M.
5 years 2 months ago
I think pointing out that QE is part of the dance that the fed/treasury do doesn’t necessarily help us decide whether at that decision point (QE) how it’s going to drive the economy. Th questions I feel best to analyze are: Why do people/institutions hold treasury bonds as opposed to cash, other investment vehicles, or spending their money on investment or consumption? What are their expectations in terms of how it is paid back? People don’t save in dollars because they think that some future hyperdeflationary event will happen when we try to pay off our debt with existing dollars. They save because they want to spend in the future, and the dollar holds enough value to do so, when adjusted for available risk-free and riskier savings vehicles. So even if there was no treasury bond instrument to invest dollars in, the decision to save would likely not be abaondoned, but simply adjusted to riskier assets to provide some return. I think the real question isn’t about QE per se, but moreso about “what decisions are banks/savers going to make when holding financial assets that are now losing 2% to inflation every year, as opposed to the bonds they held a few years back that stayed even with inflation. Simply put, this will likely do the following (in my estimation): 1) Move people to riskier assets (lending to companies/munis, and buying equity), lowering the cost of projects for companies (good for economy). 2) Increase the velocity of money in circulation as it is used for consumer goods. MMR acknowledges that the horizontal sector plays a large role, so I don’t think saying that “QE is like a tax hike” tells the whole story… QE is like a tax hike, but if you imagine a tax on holding risk-free monetary savings… Read more »
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Dan M.
5 years 2 months ago

To build on this, I try to imagine what would happen if the fed hiked rates up real high. Would MMT/MMR say, “This is good because it’s increasing the money supply via the deficit?” On one level you could say that… but this is effectively “subsidizing” saving (opposite of taxing it in my example above). You would slow the velocity of money to a crawl and get people out of riskier assets like stocks and corporate bonds.

So it seems to me that what’s important is not that you’re taxing/spending on interest, but that you are altering the motivations of players in the economy as it pertains to whether they want to hold risk-free bonds or not (aka, whether they’re being “taxed” or “subsidized.”) This has the potential to have huge affects on velocity/credit, does it not?

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Erik V
5 years 2 months ago

Moving people into riskier assets, which certainly has occured, just creates bubbles when those risky assets are not backed by a commensurate increase in discounted CFs. The Fed has contributed mightily to an equity bubble.

Also, consumer spending and long term interest rates are positively correlated, so it would seem that actions to push down interest rates actually slow the velocity of money as it pertains to consumer spending. If someone desires to save $104, then if they can earn 4% interest they must save $100, but if they can only earn 2%, they must save $101.96. People attempting to “catch up” by saving more for retirement after the 2008 meltdown are therefore consuming less partially due to low interest rates.

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Dan M.
5 years 2 months ago

Erik,

It’s not a bubble if the discounted cash flows justify the investment. Housing and Tech were bubbles because their cash flows and fundamentals DID NOT justify the investment. The fed is simply arranging that treasury bonds pay lower interest when they never needed to pay it in the first place.

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Erik V
5 years 2 months ago

I agree on all points. But when the stock of oustanding Treasuries is reduced, people buy other assets with the money they formerly had tied up in those Treasuries. The Fed is contributing to another bubble like the Tech and Housing bubbles, however this one won’t be as big.

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Dan M.
5 years 2 months ago

Erik V,

The treasuries are unnecessary instruments. By taking them out of the economy, people will naturally search for return elsewhere. This will induce more credit activity, but to say it’s a bubble is too much IMO, because as long as the cash flows justify it, there really is no bubble.

People that blame the fed for the housing bubble are simplifying it too much. Lowering rates can make previously unadvisable investments advisable, but only because the gov’t is taking something off the market it never really needed to have exist out there in the first place. Housing went WAY beyond what it should have based on interest rates alone. Interest rates were a relatively small part of the cause of the housing bubble, IMO.

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Erik V
5 years 2 months ago

I didn’t blame the Fed for the housing bubble, although I do think it played a part. My point is that the assets that are currently being bid up due to QE are not being backed by an increase in CFs. Nothing the Fed is doing is increase CFs to firms. We are witnessing P/E expansion in the equity market.

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Obsvr-1
5 years 2 months ago

Not directly, but the FED is enabling the Gov’t spend by ZIRP and buying USTrsys (effectively 0% interest on Debt) — the additional gov’t spend (money) is finding its way to business in improved Operational CF. Gov’t spend and FED intervention is driving equity and commodity markets higher.

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