Money and Money-Like Instruments: Part I

There’s been a few articles about how some assets are very much like money lately. Greg Ip had a good one in the Economist. vimothy points out Caballero and Gorton have been spouting something like MMR for a long time. Delong points out we need more safe assets and the market is screaming at us to borrow more. (Update: How did I forget David Beckworth on this? Here is his take. I’ll have more on his take in Part II)

Wray wrote a Levy Institute article about Money, and Rochon wrote a paper about money too.

They are missing something massively important from their analysis of money – the existence of money-like securities and instruments which are widely used in the financial world. They miss an important finance technology which makes these money like instruments all the more important and dangerous – the repo market.

It’s not just the fact these securities or equities exist. Rather, it’s the fact the repo market exists, and that it’s become very common to use stocks in transactions. What this does is take asset – which in the past were clearly not money and rather part of the Saving/Investment relationship and make them far more liquid, and therefore closer to money.

The statement by Minsky about money “anyone can create money, the problem is getting someone else to accept it” takes on a slightly different aspect when you think about the relative ease of monetizing financial assets today. The repo market has taken securities which in the past were illiquid and not able to be used as money and transformed them into something which is almost money.

It’s hard to understand why we think MMR has something important to add to the discussion until you recognize we’re able to shift between money and the instruments of saving and investment far easier today than we were 20 years ago.

Our last two recessions have been financial sector related recessions. In 2001, the internet  bubble popped and our economy shut off. And we should always remember the crisis in 2008 triggered when the repo market stopped dead and forced Lehman into bankruptcy.

Money-like Instruments

Gary Gorton has been talking about the repo market for the last several years, but I don’t think it has pierced the consciousness of most people who think about money. Here is a quote from Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007:

“Creation of informationally-insensitive debt is the function of the banking system. In the regulated bank sector this corresponds to insured demand deposits. The characteristics of demand deposits are: (1) demand deposits have no fixed maturity; they can be exchanged for cash at par on demand; (2) they are senior claims; (3) they are claims on a portfolio; (4) they can be used in transactions. This form of debt is created by depository institutions and by money market mutual funds that offer checking.Shadow banking combines repo with securitization (or other forms of informationally-insensitive debt) to accomplish the same function for firms. Senior tranches of securitized debt and commercial paper (not discussed here) are also quite informationally-insensitive. The shadow banking system, the combination of repo and securitized debt, is a kind of bank, as follows: (1) repo has a short maturity; it is typically overnight and can be withdrawn (not rolled over) on demand; (2) it is senior in that the collateral is senior, but also senior in the sense that there may be a haircut on the collateral (this is discussed below); (3) repo collateral is backed by a portfolio if the collateral is securitization-based debt; (4) the collateral can be used in other transactions, i.e., it can be rehypothecated. Repo is discussed further below.”

Back in the old days of 1985, if you held bonds or stocks, the major way to translate those instruments into money for yourself was to sell them.

Today, this is no longer the case. Today, it’s much easier to get money from your investments, and you don’t even have to sell them. You can repo them out, and get money short term (or if you do it every day for an extended period, long term) for those assets.

Modern bonds and securitized assets have been designed to make them easy to use in the repo market. I do recommend reading a several Gorton papers to get a full view of what he thinks is happening with the repo market and banking.

Using Equity to Purchase Equity 

It’s become vastly more common for firms to use equity of their company to purchase other companies. This is what happened in the late 1990’s. Firms used their recently issued equity as money to purchase other firms.  There was little or no debt involved in that crisis. The crash wasn’t caused by there being too much debt in the system.

But the end result was recession – and it was a horrible recession. As far as I can tell, the economy just stopped.

S – I + (S-I)

We’ve been talking a ton about our seemingly simple equation S = I + (S-I), and showing the importance of private sector S and I. But it hasn’t been clear to people why we’re doing this and sometimes, they entirely disagree with our assessment of the importance of this equation.

The presence of the repo market and utilization of equity as money makes this equation central to our understanding of the economy.

As Minsky said “Anyone can create money – the problem is getting it accepted”. We’ve created a system where there are at least two huge ways to create money outside of the “traditional” horizontal and vertical money creation channels.

The repo market can take private sector financial assets and translate them into money for individuals for people very quickly. It’s entirely possible to take securitized assets, existing bonds or even stocks and go and get them repo’ed out for short term money.

The usage of equity to purchase other firms makes equity into a form of money entirely outside of the realm of what we consider horizontal or vertical money. The equity of a firm is simply what others will accept for that equity.

In the past, the money creation process was pretty slow moving – getting a loan from a bank was a lengthy and time consuming process. Using equity to buy another firm wasn’t common enough to be a problem.

This is no longer the case at all. It’s entirely possible to get money from an asset without selling it, and without what most people would consider borrowing. Using equity to buy other firms is very common.

Repos as a Glance

Let’s look at a repo and see how they work.

A repo is a trade where you get money for an asset, with a promise to repay that money plus some interest at a future date. The lender takes possession of the asset as collateral, but ownership does not shift unless the borrower does not repay the loan.

There are two important terms to know when talking about repos: haircut and repo rate.

The haircut is the amount of discount the lender gives the asset before they allow the borrower to post it as collateral. Let’s say you have a bond worth 100. The lender might say “I’ll only let you borrow 80 for it.”  That 20% is the haircut on the asset.

The haircut is there to give the borrower an incentive to pay back the loan.

The repo rate is the amount of interest paid on the loan for the duration. The lender might say “I’ll let you borrow 80, and you owe me 88 when you pay me back.” The repo rate would be 10% for this instrument.

The haircut also determines how much money is “allowed” to be borrowed against the asset. As the haircut goes up, the amount of borrowing allowed goes down. This became important in the crisis of 2008, when the system raised haircuts on nearly every asset in the world, and the system found itself short roughly $3t in cash.

Low borrowing rates for good assets

Something even more important is you can borrow money against good assets for very low amounts. If you have high quality debt, the repo rates were and are very low.

Essentially, this becomes something close to free money. You have an asset, plus cash whenever you want it. For example, repo rates right now on U.S. government debt is 19bps.  That’s .19% per year in interest payments. Free money any time you need it.

Equity

Also, it’s good to remember the problems in 2001 had nothing to do with debt, but rather happened because the prices of some equities fell dramatically. There wasn’t a debt overhang which froze the worlds markets. Rather, the ability of companies to purchase other firms and real world assets with their equity as collateral fell dramatically.

Summary for Part I

All of this points to something interesting and even profound. We have taken some assets allowed them to be translated to money through financial techniques. I argue the widespread awareness of these techniques makes those assets far more “money-like” than they had been even 30 years ago.

 

Comments

  1. paulie46 says:

    Free money any time you need it.

    But you still have to pay it back…

    …by means of extraction from others.

    btw cool commenting software you guys are using.

    • Well if the market can “extract” the value of real (non-financial: Houses, factories) assets and insert them into stable claims on those assets, then this “extraction” can simply result in more investment in productive non-financial assets.

      Monetization of real assets is the ultimate crux of private money. It made up a lot of the IOU’s that made up money in the 1800’s. Undermining the role of private money to extract real value out of the economy is what turns off so many people to MMT.

    • Cullen Roche says:

      When do all of these loans get paid back? It’s like claiming that the govt “pays back” its debts. No. That doesn’t happen. The debts have all been growing in perpetuity since the beginning of time. At the micro, yes, you pay back your loan. But in the aggregate the amount of loans outstanding aren’t being “paid back”. They’re growing….FOREVER. MMT loves to obscure this point by saying that bank money gets “destroyed” when it’s repaid because the loan results in a markdown of the asset and liability. But that’s not what really happens. What really happens is this:

      Private debt doesn’t get “paid back” any more so than govt debt does. MMT totally misconstrues this point with the tautology about “net financial assets” and an attempt to bring the power back to the govt always. Meanwhile, out here in the real world the banks are swinging their loan books around at businesses who are helping grow the real economy. And they’re doing it without a care in the world for what the govt says or does.

      Also, I noticed Lavoie’s excellent point about language in MMT and their use of the word “leverage” when discussing horizontal money. This is another error on their part. There is no “leveraging” of govt money. But MMT tries to have it both ways by saying there is no money multiplier, but by also creating a 1:1 relationship between banks and govt that doesn’t exist under the current framework!

      • CR,

        Beautiful… then the next question is “what bouey’s all that credit?” Answer: Production. All the mortgages that attach the money to real assets via credit allow a mostly private system of money to be sustained with a few requests from government:

        1) Enforce our contracts.
        2) Supply enough NFA’s that society demands at the time to keep a stable economy at full capacity.
        3) Create an environment conducive to production of real wealth.

        Notice, only when the underlying productive asset (a home “produces” shelter) price was decidedly over-rated, and eventually declined, did the private money system break down. Yes, we suffered later as a result of having too few NFA’s, but the fundamentals of the problem were the non-financial assets, and the financial assets/liabilities attached to them. This means that the driver of the horizontal money is just as much non-financial assets as it is Net Financial Assets.

        Saying that those horizontal assets net to zero and then forgetting about it is like saying all the energy in the universe (matter v. anti-matter) nets to zero so we don’t really exist so why study anything! I realize this analogy is a bit of a stretch, but looking back, MMT very much undersells horizontal money & production.

        • Cullen Roche says:

          YES! I think people are finally starting to see the pieces come together on this whole MMR thing we’ve started. We didn’t start it based on a disagreement about political ideology or the silly job guarantee. It’s SO much more than that. Thanks Dan.

          • Glad I’m on the right track.

            While I think the “surpluses & recessions” correlation should be shouted from the mountain tops, there’s more to it than NFA’s, especially in 2008. I think it’s really telling when you hear MMT’ers discuss 2008 and say that “the lack of NFA’s forced households to borrow more” (I dont’ think I’m overly misuoting here) and that’s why we had a housing bubble. The housing market was simply not moving on fundamentals. People shouldn’t have borrowed so much not because they didn’t own enough T-Bills, but because rents, salaries, and their job stability DIDN’T WARRANT the price of housing at the time. What is more T-Bills on the balance sheet going to do? Well, simply, help the economy heal itself after the crash of housing, and subsequent poisoning of a set of debt instruments called MBS’s.

            While the lack of NFA’s hurt in 2008, their claim of NFA’s keeping us grounded is just utterly ridiculous. It’s like saying that all the life boats on a ship will help keep the ship from hitting an ice berg. Next thing you know NFA’s will cure cancer and keep our daughters from getting pregnant (If Rick Santorum doesn’t do the latter for us first ;).

      • Cullen

        I plan to respond to this post very carefully but I need to think about it for awhile.

        My response as always will be based on the properties of closed systems, not MMT, thus will not involve any MMT/MMR sparring :-)

        My response should cover Dan M.’s and Michael S.’ comments also.

        Any claim one makes that violates closed system properties will be pushed back on (if it suits me) no matter who makes them (and I have had these discussions in the past with MMT proponents, Austrians and anyone else that doesn’t get it). Most engineers and physicists should but some may not see the parallels with monetary systems.

        “Any method involving the notion of entropy, the very existence of which depends on the second law of thermodynamics, will doubtless seem to many far-fetched, and may repel beginners as obscure and difficult of comprehension.”—Willard Gibbs, Graphical Methods in the Thermodynamics of Fluids (1873)

        Are we allowed (encouraged) to insert inline graphics here? I see you have done it but you’re special :-)

        • Cullen Roche says:

          You can give it a try! I don’t know if users can insert images or not, but I presume the standard HTML code would work.

        • Paulie the closed systems to which refer to in your vertical/horizontal are not closed. Our Sun constantly injects “assets” into our system which allows it to move.

          • Sergei March 17, 2012 at 12:15 pm
            Paulie the closed systems to which refer to in your vertical/horizontal are not closed. Our Sun constantly injects “assets” into our system which allows it to move.

            Our thinking is converging. In our economic system dollars are the only “energy” (assets) being injected into the monetary economy. Balancing the budget “closes” the system as far as net financial assets are concerned.

            Horizontal money isn’t readily analogous to anything in the physical world I can think of. Maybe we would look at it as a”wave” propagating through the system that eventually dissipates as the energy is lost as heat.

            Horizontal money (spending) boosts demand quickly, but demand dissipates as it slowly decreases spending (dis-spending). Annihilation of dollars. One can continue borrowing to keep the demand going but there is a functional limit. I think we are past it.

            • “In our economic system dollars are the only “energy” (assets) being injected into the monetary economy.”

              Careful with that. IOU’s are money. If you don’t pay your mortgage the bank can take your house (as clumsy and unpleasant as that is, it strengthens their loan). This is quasi-private money built on a non-financial asset, and attached thereto via collateral contract. The expansion of credit is one with the asset. There’s a new asset there.

              If the monetary economy is strengthened by the assets that get assembled as a result of the horizontal money, then there is in effect adding other “energy” to the money that you’re not accounting for.

              • paulie46 says:

                Dan M.

                “…There’s a new asset there.…”

                There’s also a new liability there equal to the asset created.

                Other than that I’m not quite following your line of argument.

                • I’m saying the home, factory, or production that exists as a result of, AND secures the horizontal loan is a NEW asset, and it’s boueying the value of the financial asset it’s attached to. This is in effect quasi-private currency (though it must be serviced by US dollars).

                  For instance, if you were to immediately de-securitize every loan in existence and make all secured creditors unsecured overnight, you’d see a huge collapse of the structure that the horizontal system is built on. This structure of collateralized production allows horizontal money function for years and years with what would otherwise appear to be too few NFA’s in the system.

                  • Cullen Roche says:

                    Here’s a good example of this. So, I am starting a new RIA. It’s formed in Deleware, but a shell of a company right now. Nothing exists. It’s just ideas in my head right now. But I’ve already been allocated a sizable loan from the bank. Technically, the company is worth zero. Nada. It doesn’t even really exist in any form. But the loan is very real to me and the bank. Even though there’s nothing really backing it up right now except a bunch of ideas in my head.

                  • CR,

                    Yeah. And there’s some of this and the market and that is fine, but (and I’m not sure you’re disagreeing with me) the market can sustain only so many loans like that. If you desecuritized all loans overnight our system of credit would likely collapse.

                    So there’s more than NFA’s giving private credit structural clout. There’s non-financial assets attached to these loans. Money like this can go on for a long, long time before “not enough NFA’s” rears its head. This is why the MMT claim that more savings would have fixed the housing crash is very incomplete.

                  • paulie46 says:

                    Dan M.

                    If one buys an existing home there is no NEW asset unless the seller realizes a profit.

                    At the micro level this is inconsequential but in the aggregate the net change in cash on ALL balance sheets must increase by the amount of the gain, or the difference will have to come from another agent dis-saving. Horizontal money (credit) can’t perform this function.

                    If we are talking about a new home then the only asset created is the labor component plus profit, and those must be monetized. Again, credit only makes the transaction (home sale) possible it doesn’t provide the dollars necessary to realize the gain. The dollars come from another agents pocket. Credit dollars are forever destined to return to the ether, that’s what liability means. Liabilities are monetized (returned to zero) when thet are satisfied.

            • paulie46 says:

              Sergei,

              I neglected to mention that as the Sun injects energy into our local system, the Earth is simultaneously losing energy to space. The earth environment itself remains in equilibrium.

              • Paulie: the Earth is simultaneously losing energy to space

                Looks like you have not heard of global warming :)

                • paulie46 says:

                  Sergei March 17, 2012 at 2:28 pm
                  Paulie: the Earth is simultaneously losing energy to space

                  Looks like you have not heard of global warming.

                  A closed-system phenomenon but I’m sure you already know that.

            • Hi paulie,

              The word functional is….wrong somehow. There isn’t a functional limit on credit creation. We can create credit forever. The problem is as minsky says “getting it accepted”

              I take your point very seriously and think its correct- creating too much credit ends in tears, and we created too much credit.

              • paulie46 says:

                Michael Sankowski March 21, 2012 at 12:20 am
                Hi paulie,

                The word functional is….wrong somehow …

                Michael you are one of the most reasonable and practical posters here so I’m only responding here to make a point. I can be a pedant too. :-)

                functional (adjective); practical, useful

                Credit can technically be “created forever”, but practically speaking it can’t because there is a limit to an agents ability to borrow.

                The borrower is limited by his ability to service debt (income) and by the limited existence of dollars he must obtain to repay.

                One can’t depend on others to borrow dollars into existence in order to service one’s own debt. Practically the definition of unsustainable.

                • paulie,

                  You’re getting my meaning entirely – functional isn’t incorrect at all, but I “feel” there might be a word with different connotations which expresses the concept we’re both trying to hit with more gusto. :)

      • paulie46 says:

        Here goes – hope it doesn’t view as a big mess…

        Cullen…

        When do all of these loans get paid back?…
        …No. That doesn’t happen. The debts have
        all been growing in perpetuity since the beginning of time.

        At the micro, yes, you
        pay back your loan. But in the aggregate the amount of loans outstanding
        aren’t being “paid back”. They’re growing….FOREVER.
        MMT loves to obscure this
        point by saying that bank money gets “destroyed” when it’s repaid because
        the loan results in a markdown of the asset and liability. But that’s not
        what really happens. What really happens is this:
        [LOANS] graphic
        Private debt doesn’t get
        “paid back” any more so than govt debt does.

        MMT totally misconstrues this point with
        the tautology about “net financial assets” and an attempt to bring the
        power back to the govt always.

        Dan M…
        Well if the
        market can “extract” the value of real (non-financial: Houses,
        factories) assets and insert them into stable claims on those assets,
        then this “extraction” can simply result in more investment in
        productive non-financial assets.

        Monetization of real assets is the
        ultimate crux of private money …


        Undermining the role of private money to extract real value out of the
        economy is what turns off so many people to MMT.
        …I think
        it’s really telling when you hear MMT’ers discuss 2008 and say that “the
        lack of NFA’s forced households to borrow more” … and that’s why we had
        a housing bubble.
        …People
        shouldn’t have borrowed so much not because they didn’t own enough
        T-Bills, but because rents, salaries, and their job stability DIDN’T
        WARRANT the price of housing at the time.

        What is more
        T-Bills on the balance sheet going to do? Well, simply, help the economy
        heal itself after the crash of housing…

        Michael Sankowski…

        The point
        I am trying to make is it is so much easier to get money than it used to
        be if you own assets…
        … now
        there’s a whole standardized process for dealing repos which hugely
        facilitate the process.

        …Selling
        and re-buying assets usually has huge transaction costs and price risk
        baked in. Repos eliminate all of that.
        Cullen
        The problem with your theory is that credit
        can’t get us out of the situation we find ourselves in – too much private
        credit already. I doubt that you are advocating a “borrow from Peter to
        pay Paul” policy.
        I expect credit to grow at a much slower rate from here on out.

        If you think credit is going to get us out of this situation it’s a good
        thing you are young and will live long enough to see it. In the meantime
        net government spending will do the heavy lifting.

        I think you are wrong about the “leverage” issue but I will visit that
        some other time.

        There are four kinds of people in the world:

        Those that climb the mountain because it
        is there.
        Those that climb the mountain because we pay them to do it.
        Those that wouldn’t climb the mountain no matter what we paid them.
        Those that want to own the mountain.

        Dan M.
        NFA’s the government spends into the
        non-government are dollars not treasuries. Savings of
        agents that have accumulated dollars are swapped for treasuries and spent
        where they will generate aggregate demand. It’s a kind of re-distribution,
        which in the end is what drives the economy. The non-government cannot
        create demand in this way because the non-government cannot create “net”
        dollars..

        Dollars from credit alone cannot create net financial assets or net
        saving. It is mathematically impossible. Credit can only alter the
        distribution of net financial assets or net saving.

        If some agents save in a credit economy other agents cannot obtain the
        dollars needed to service their debt. Net government spending is the only
        alternative unless the savers dis-save and even then perfect matching of
        assets against liabilities does not happen naturally. No known system is
        100% efficient, hence no perpetual-motion machines.

        If the agents can “extract” dollars from their real assets by borrowing
        against them those agents cannot realize any gains until they have managed
        to “extract” dollars from other agents in excess of their borrowing.

        How does net government spending undermine the role of private money?

        People borrowed because credit was provided with no strings attached and
        they weren’t making enough money to maintain their standard of living
        without borrowing. Everyone and their brother was caught up in the
        euphoria of the housing boom and none of the most respected authorities in
        finance said “wait a minute”, this can’t work.

        Lenders violated their fiduciary responsibility in a big way. Their most
        important function is prudent underwriting and it was ignored
        systemically. Moral hazard bordering on or outright criminal behavior.
        Treasuries are a safe-haven for dollar assets. They have outperformed gold
        and stocks over the past 30 years. Treasuries are savings. Accumulated
        dollar wealth.
        Michael Sankowski…
        Easy money can do more harm than good as we
        have seen. Borrowers must have the ability to repay the loans. The money
        necessary to satisfy loans is off-the-table when saved by others. Cue net
        government spending to save the day.

        We can remove all the friction there is in transactions, the
        non-government still cannot create net financial assets. Gains must be
        monetized and in our system there is only one way. TINA.

        • paulie46 says:

          So much for my html skills. We need a delete comment function added here as well as a preview.

        • I dont think its even correct to say that credit has been growing in perpetuity. In a sense its true, most every generation takes out credit (there is no alternative ususally) but banks have not been like govts in that they simply roll over and reaccumulate debts. As Nassim Taleb has pointed out, banks, over the history of their existence, are net money losers. This is if you measure them the same way you measure losses in a private sector currency user type framework. They have consistently gotten bailed out by govts/HPM/fiat issuers though so their losses can also be measured in the way we measure a govts losses. No one would (no one here with the knowledge of MMT/MMR anyway) would ever suggest that a govt like the US “lost money” on an endeavor. Wasted money? Sure. But not lost as in negative equity.

          I think the way I look at banking, as a private sector govt with two sets of rules one for lenders and one for borrowers, is most helpful. It works ok most of the time because borrowers have income and can support the loan levels but when a crisis arises (almost always in the private sector….. leading to income losses) The banking sector via a CB covers the banks losses with unlimited liquidity to keep payments flowing but then plays a zero sum game with borrowers and expects them to work harder to pay back their loans, which is all well and good but one must then support policies which make jobs available for people to make the income to pay back their loans. How can one work to pay back a loan when your job has just been determined “unnecessary”. The inner logic of the private credit system cannot support itself in times of stress it seems.

          • Cullen Roche says:

            The data on loan creation speaks for itself. There is no such thing as “destroying” aggregate debt except in the very near-term. It grows perpetually as long as the economy grows….MMT obscures this point with vague language about net financials assets.

            • Cullen…

              It isn’t obscure to me. This is a strawman argument. The closed-system characteristics of economies is counter-intuitive, mainly because we have been taught a fantasy about how finances work.

              Most people are confused and many are unable to grasp it. Not because they aren’t smart but because their brains just aren’t wired to “see” the abstraction in real-world terms.

              No loans would be satisfied if we didn’t pay them back. If one doesn’t satify initial loans there won’t be any loan growth down the road. If there are financial roadblocks to loan servicing the system ceases to function.

              How you can blame this on MMT is puzzling.

              Your argument is not very convincing.

              A suggestion. Be more like an engineer. Define a problem before you attempt to solve it.

              • btw

                I figured out you can preview comments in you web browser. Write your comment in a text editor using standard html tags and open the file from your browser. Make changes, then refresh. In my browser (Safari) the blockquote bar doesn’t show up but it will when you post.

                • Is it really a closed system in the truest sense when private-sector non-financial real assets (a variable amount) can be contractually attached to horizontal money, thereby not only strengthening the money through collateral, but strengthen the non-financial asset through a system of monetization.

                  If a vibrant horizontal sector with collateralization can help the following come about:

                  +$1 Million Financial Asset: Mortgage on Factory
                  -$1 Million Financial Liability: Loan to Bank
                  +$1 Million Factory: Contractually Connected to Loan

                  Total +$1 Million.

                  This factory would likely not have been built if not for horizontal money. It’s also contractually attached to the horizontal money.

                  A healthy value-producing private sector can significantly increase the strength of the horizontal money. That means that real changes can occur for decades in the real economy before NFA’s (or the lack thereof) take the steering wheel.

                  • Dan M. March 16, 2012 at 11:50 am
                    Is it really a closed system in the truest sense when private-sector
                    non-financial real assets (a variable amount) can be contractually
                    attached to horizontal money, thereby not only strengthening the money
                    through collateral, but strengthen the non-financial asset through a
                    system of monetization.

                    Yes Dan it really is a (monetary/nominal) closed system in the truest sense. Changed only when the government net spends. The monetary closed system is separate but parallel to the non-financial closed system. The linkage is soft, marked to balance sheets (real and virtual) for all transactions between the real and monetary economies.

              • Cullen Roche says:

                Okay, then explain how all that debt is being “destroyed” as MMT describes it. Because it’s clearly not being “destroyed”. It’s essentially rolling over in perpetuity and has been for a hundred years.

                While you’re at it, explain why MMT says the banks “leverage” govt money because that’s clearly wrong also. MMTers don’t believe the money multiplier. There’s no leveraging of anything going on there.

                While you’re doing that you might as well try to explain why MMT says the govt has a “money monopoly”. MMT says credit is money. MMT also says monopoly power is always about controlling price. But credit, which is money, is not price controlled by the govt so the whole money monopoly argument is dead wrong also. But MMT uses vague words like “leverage” or the hierarchy to create a 1:1 relationship where one doesn’t exist….Talk about obscure!!!!

                These are obscure points to most other people whether you think you understand them or not.

                • paulie46 says:

                  Cullen Roche March 16, 2012 at 11:37 am
                  Okay, then explain how all that debt is being “destroyed” as MMT
                  describes it. Because it’s clearly not being “destroyed”. It’s
                  essentially rolling over in perpetuity and has been for a hundred
                  years.
                  While you’re at it, explain why MMT says the banks “leverage” govt
                  money because that’s clearly wrong also. MMTers don’t believe the
                  money multiplier. There’s no leveraging of anything going on there.
                  While you’re doing that you might as well try to explain why MMT says
                  the govt has a “money monopoly”. MMT says credit is money. MMT also
                  says monopoly power is always about controlling price. But credit,
                  which is money, is not price controlled by the govt so the whole money
                  monopoly argument is dead wrong also. But MMT uses vague words like
                  “leverage” or the hierarchy to create a 1:1 relationship where one
                  doesn’t exist….Talk about obscure!!!!
                  These are obscure points to most other people whether you think you
                  understand them or not.

                  Cullen (I assume your comment is addressed to me)

                  I do not speak for MMT. I will try to answer some of your questions however.

                  “…explain how all that debt is being “destroyed” as MMT describes it. Because it’s clearly not being “destroyed”. It’s essentially rolling over in perpetuity and has been for a hundred years…”

                  Every time a payment is made those dollars are destroyed. They cease to exist, just as they didn’t exist before the loan was made.

                  “…While you’re at it, explain why MMT says the banks “leverage” govt money because that’s clearly wrong also. MMTers don’t believe the money multiplier. There’s no leveraging of anything going on there…”

                  Banks leverage money they don’t have into money-making loans. If there is no reserve requirement the leverage is infinite. If there is a reserve requirement leverage is effectively infinite except for the fact the bank has to manage it’s capital/liquidity position.

                  As far as the money monopoly argument, I think that depends on what the individual’s idea of a monopoly means. Clearly you see it different than the MMT bunch and I don’t see how it matters as far as the math relationships are concerned so again, I don’t spend a lot of time thinking about it.

                  I only care for any of these definitional assignments so far as they relate to the math structure behind them. If there is a constraint that changes the math then I pay attention to it.

                  As far as I can tell, MMT hasn’t proposed anything that is not supported by math (ie as in closed system math, which is actually quite simple).

  2. Госбанк says:

    Repo is nothing more but a collaterized(secured) loan of a very short tenor.

    I’d not call it free money, though, because 1) its cheapness is due to extremely short tenor: 19bps yearly is for cash loaned for only *one* day; 2) the repo market is unavailable to an individual player/household. 3) it is not final settlement money but just a means to get cash to settle despite its semblance of being cash.

    Legal ownership, by the way, does shift to the cash lender for the duration of the repo loan.

    • It’s not free money, but most people would consider borrowing money at .19% per year to be free in every sense but the literal meaning of free.

      I should probably be more precise, but it’s tough to write for every audience at the same time.

      The point I am trying to make is it is so much easier to get money than it used to be if you own assets. Before, you needed to sell these assets, then buy them back when you needed to – now there’s a whole standardized process for dealing repos which hugely facilitate the process.

      And the repo part is especially important. Selling and re-buying assets usually has huge transaction costs and price risk baked in. Repos eliminate all of that.

  3. David Beckworth says:

    How is that I find myself agreeing with a former MMTer? Differences remain between our views, but it is interesting that in this area we find much common ground. Now if I could only get you to better appreciate nominal GDP targeting :)

    I made my own comments about Greg Ip here: http://macromarketmusings.blogspot.com/2012/03/greg-ip-on-safe-assets-as-money.html

    • Cullen Roche says:

      Hi David,

      Part of our split from the MMT group was precisely because we find ourselves agreeing with many aspects of these other schools that MMTers just flat out reject in their entirety. I guess you could say we’re trying to use MMR to “broaden our horizons” and see where we can find more compatibility with other schools of thought. There are aspects of Market Monetarism that I find very appealing. I hope we’ll explore that further as time goes on. As you may or may not know this whole MMR movement is fairly new, but it’s exciting to see the response from other schools and the various ways in which they’ll be compatible with our views. We’ll see you around.

      Always enjoy your work by the way so thanks for all you do.

      Cullen

    • Hi David,

      I can’t believe I didn’t link to your post – of course I had read it! I have to run right now, but you raise a ton of interesting points. The triffin dilemma is something particularly juicy – I am less afraid of it than you are, but it exists even in a no-default sovereign world.

  4. David Beckworth says:

    Michael, you might find the work on monetary divisia measures by Bill Barnett interesting. The idea behind monetary divisia measures is that not all monetary assets are perfect substitutes and monetary aggregate measures should reflect this reality. Thus, the monetary aggregates measured by the Fed, which use a simple sum approach, are flawed.

    Bill Barnett and the folks at the Center for Financial Stability have attempted to construct monetary divisia measures that include the institutional money assets. See here: http://www.centerforfinancialstability.org/amfm_data.php My only question with this data is have they included all the safe assets used as money?

    • “Hey guys. Nice work here as usual. It looks like the MMTers are starting to hyperventilate over the momentum you’re gaining.”

      Yeah their anger at Cullen is apparently what motivates some people to get up in the morning.

    • It’s probably impossible to tell anymore. The idea of repo and widespread financial knowledge makes far more instruments money-like. As long as you can accept the haircut, you can get cash right away.

      The rub is we’re letting the repo market provide a substantial amount of cash liquidity to the economy – cash we need to keep moving through our economy every day. It’s terrifying.

      I’ll take a look at those divisia measures by Barnett.

      And on NGDP targeting – well… I think we can average better than 3% RGDP growth.

      ;)

  5. Hey guys. Nice work here as usual. It looks like the MMTers are starting to hyperventilate over the momentum you’re gaining.

    http://mikenormaneconomics.blogspot.com/2012/03/four-guestions-to-mmters-and-some.html

    • Cullen Roche says:

      The entire MMT approach is designed to emphasize the power and influence of the govt. The monopolist, the JG, the emphasis on vertical, “state theory of money”, etc etc. It is what it is. And I call em like I see em. If I’m the bad guy for calling it what it is then I guess I am a bad guy….At least a few MMTers (Mitch Green, Randy and Bill) are starting to really own their political perspective. Even Tom Hickey called MMT an ideology. So good for them. If they’re going to present this policy driven approach to macro then they should embrace that and show the public why their approach is right. There’s nothing wrong with that. I personally was not convinced by the evidence they presented on the JG, but that’s just me. I never agreed with the state theory or the taxes drive money component so the JG was a wake up call for me on past disagreements. The thing is you don’t find Robert Murphy pretending to be a liberal do you? Or Scott Sumner? Or Krugman pretending to be conservative. They own their politics because their macro approach is based on policies!!! Just like MMT.

      It’s the misconception and attempts to align themselves with Austrians and the like that irritates people because the MMT approach is not about small govt. They even try to frame Warren as a conservative at times. He ran for Senate as a democrat! Their version of “right” is “left”!!! MMT is specifically about the state and emphasizing and utilizing its strengths. There’s nothing wrong with that! I was a fool to convince myself that I could create this apolitical version of MMT. No wonder Bill and the others expressed their discontent with me at times. I was trying to change their theory into something it wasn’t. So it’s a good thing this all came to a head because now they have the opportunity to reclaim what MMT really is. And they should.

      Now, if they want to blast us for being political then fine, but I think it’s very hard to pin us as being political when we take a heterodox approach that focuses on the private sector and public sector strengths with an almost purely operational approach. There’s no such thing as “MMR Policies”…..Just a group of understandings and individuals who propose different things. Hell, the three of us don’t even agree on all the policies described here on the site so far….They’re “options” just as they should be. Not a “crucial” part of a macro framework. Our approach as non-economists doesn’t necessarily involve a set of world saving policies as a macro framework. We want the world to understand how the world works so the world can then CHOOSE for themselves how to benefit from it….

    • Spoony Bard says:

      The tone in this may be acerbic but I find it to be accurate. Mosler’s answers are what matters. Hickey is smart, honest, and reasonable, and I hesitate to label him MMT. Kervick I’m not certain I’d label MMT either. The rest (UMKC) are Post Keynesian choosing to understate it for whatever reason and market themselves as unique with the objective of overzealously promoting ideology guised as economic policy. It had been effective until the job guarantee and the resulting condemnation of anyone who disagreed.

  6. David Beckworth says:

    Cullen and Michael, this MMR project looks interesting. Keep up the good work.

  7. Dan Kervick says:

    Delong points out we need more safe assets and the market is screaming at us to borrow more.

    This is a very strange view if you ask me. Matt Yglesias has also been arguing over the past few years that the reason we should feel OK about running the deficits we need is because borrowing costs are so low. Maybe the NKers think this is some kind of selling point for expanded deficit spending, but it gives way too much credence to lame understandings of the deficit and government financing for my taste.

    We should be running deficits because we are in a crappy economy with massive unemployment and inadequate aggregate demand, and because we can’t boost aggregate demand by somehow shoving money out into the real economy with QE-type operations modeled on the money multiplier view. Maybe this is a point on which MMTers and MMRers still agree?

    It doesn’t really matter what the government’s lending rate is as long as the Fed is willing to gobble up government debt. There are also alternative mechanisms for running deficits that, once enacted as a legal alternative, would be much less byzantine and more transparent and efficient than the privately intermediated treasury security method we use now. The deficit should be an issue between the treasury and the central bank. We don’t need to use treasury securities that reward middle men with dealer profits for what should be a routine intra-governmental operation. If we want to issue government securities because we think it is a good thing to provide government-guaranteed savings vehicles, that is another thing. But it should be mixed up with our financing operations.

    Back to DeLong’s point, aren’t there more than enough safe assets as it is? Isn’t part of the problem with this economy that there is too much investment locked up in safe assets? Don’t we need to be putting more of our real resources into production and employment, which are inherently risky activities? Yes, I would like a perpetual pony that never gets old and gives me a nice safe ride for the rest of my days. But that doesn’t mean I am entitled to one. And it certainly doesn’t mean that the provision of more safe ponies is a good thing for the economy . While everybody is sauntering along on their slow little ponies, we need more productive investment – more private sector productive investment and more government productive investment. I don’t care how many people are “screaming” for safety.

    The idea that every person is entitled to be able to save risk-free and inflation free in the currency instrument of their choice is to my mind one of the worst aspects of the Austrian view of the monetary economy. Weird to see DeLong defending it.

    • Dan Kervick says:

      But it should be mixed up with our financing operations.

      Should have written:

      But it shouldn’t be mixed up with our financing operations.

    • Mike, Dan’s comment is sort of related to mine here http://monetaryrealism.com/coffee-links-3-12-2012/#comment-2908 . The shortage of safe asset concept doesn’t seem coherent or to align well with the MMT/MMR? understanding of fiscal and monetary policy. As John Carney writes here (http://www.cnbc.com//id/46720765), the bond market really isn’t telling us much about what the ‘free market’ wants or its savings desires per se. It is instead telling us about the market’s expectations of the path of future Fed policy; the success of bond auctions is driven by “arbitrage” against Fed policy.

      I could very well be not understanding the point though.

      • To clarify, investors can try to play vigilante, but at the end of the day, it’s a story about Fed policy.

        • That all being said, I think I understand the importance of repo markets and the role tsys serve. But this is a separate point from the Yglesias/DeLong/etc meme about the market’s thirst for safe assets.

          • But don’t we talk about this all the time when we talk about society’s will to “net save” at certain periods?

            I think that might still apply… in fact I’m starting to develop a confusion as to whether the will to “net save” is a whole lot different than the “loanable funds” model where you show a supply/demand of loanable funds. If there’s any unevenness in supply/demand of loanable funds (let’s pretend there’s no fed window for a sec), then doesn’t that fit SOMEWHAT well into the “demand for net saving” narrative?

      • Maybe “demand for safe assets” means demand for NFA’s in general. I think we can look at a society’s will to net save (save and not invest) with reasonable confidence. Maybe using a “loanable funds” model is wrong, but a “shit all our horizontal money is confetti, we want hard cash” model might be appropriate.

        • Maybe that’s it? It just seems like an odd and roundabout way to say AD has collapsed. It’s like what Mike said the other day about the clarity of Godley vs some 11 page paper written by some author I can’t remember right now.

      • Cullen Roche says:

        Isn’t the creation of all that AAA rated mortgage backed paper a sign that the pvt sector has an enormous appetite for risk free (or near risk free) paper? Of course this isn’t financing anything, but the pvt sector always has a huge appetite for risk free paper earning a decent return. I am pretty sure Mike is making a different point from a different perspective then Delong is. MMR didn’t stop remembering that autonomous currency issuers don’t “fund” themselves!

        But maybe I am missing your point?

        • I should have read Greg Ip’s piece first :). He does indeed make some interesting points (and woo he gets bank lending right!!!).

          Let me try to clarify my position. If, as Dan M is alluding to, the idea is that AD is collapsed is tantamount to a shortage of safe assets is tantamount to a desire to net save, that makes sense on the surface (having not yet put too much thought into it).

          However, my issue is with the idea of using govt bond interest rates to judge if there is a shortage of safe assets. My knee-jerk reaction to this concept was that we can’t use the interest rate on govt bonds to tell us much about market’s desire for safe assets because of the story John Carney clearly lays out – this is Fed driven. But perhaps I am oversimplifying, and you actually can tell. And if you can, how do you disentangle all the different drivers of govt bond interest rates to measure the desire for safe assets? Lastly, why not just look at the size of the output gap?

          • Cullen Roche says:

            Isn’t part of monetary policy based on the idea of the wealth effect and trying to drive people into riskier assets? Isn’t the govt intentionally driving rates down with the hope of driving investment? Ie, there is a shortage of safe assets, but that’s what the govt wants? Of course this isn’t funding govt spending and low rates aren’t a justification for more spending (that argument misinterprets govt spending), but the Fed wants the private sector to essentially create its own low risk assets? Of course, the govt could just do this by crediting banks accounts, but that’s obviously out of the Fed’s control….

      • Ben Wolf says:

        To be honest I’m not sure it’s even correct to say there IS a bond market in reference to the U.S., in terms of signalling. The Fed exerts overwhelming power on bond scarcity and ironically doesn’t even really need a market, it just uses it because under current laws that’s the tool available. Nor do I see much evidence the Fed much cares what the market wants or needs. I think it’s safe to say the private sector is currently starved for savings interest but that appears to play no part in the decisions the FOMC makes.

        • I agree with this today, but I feel like the loanable funds model is a useful starting place for people to start thinking about this stuff.

          I tend to think it’s useful to understand fractional reserve banking before trying to absorb MMR’s assertion of “irrelevent” reserve banking.

          The next question to ask, then, is since we’re not really in a bond market, the next step would maybe be the assertion that the bond market is just built on top of a CURRENCY market. Our currency is really what is out there in the market place. We may never have to pay 10% on a treasury bond ever again, but we could still get to a point where our currency is rejected.

          So what is that point? What does it look like? What induces it? If we QE’d all the debt, would people still hold our dollars? If not, why, because they were barely paying interest before, so what’s so different now?

          My thought that if QE simultaneously spurs on domestic credit expansion, as well as induces foreign savers to look at their cash and say “why am I holding this at .2% interest,” then can we much more easily get ourselves into a self-fulfilling inflationary panic? Does having higher treasury-bond interest prevent that event horizon?

          • Ben Wolf says:

            “The next question to ask, then, is since we’re not really in a bond market, the next step would maybe be the assertion that the bond market is just built on top of a CURRENCY market.”

            That’s an interesting idea, maybe even a rule for countries sovereign in their own currencies. A bond market which is only a screen covering the currency market.

      • Well, that’s more for part II of this essay. This part I was pointing out we have created a machine which takes nearly any financial instrument as very money like in some situations. The existence of the repo market makes cash money far less special than it was in the past.

        Part II will be about how we need far more credit/money/NFA than we normally create to run the economy. I’d ask, why do we consider the internet bubble to be a bubble and not just people working normally? Why did it take a massive real estate bubble just to give the world enough money to operate at 3% RGDP growth?

    • I kind of agree with everything you just said.

      I think it could help people temprorarily absorb why rates can be so low as set by the market if we use a “loanable funds” model… that’s how I came to understand it before MMT, and at least during that time I was on the right side of the deficit-hawk vs. unemployment-hawk debate… even if it may have been for the wrong reasons.

      Also, I think I need for someone to clarify for me how banks are 100% NOT reserve constrained… it seems to me that if a bank is getting to the point where they have to borrow from the fed to lend they are going to be charging their borrowers premiums for it… isn’t the fed window a higher rate than the treasuries they could buy with reserves, and therefore accessing it more painful than simply draining their t-bills to lend money?

      • Here’s my intuition. Let’s assume this isn’t a matter of a credit crisis. If banks system wide are having to go to the discount window, then I would presume upward pressure would have already been placed in the interbank market for fed funds. If that would be happening, then the Fed would respond by injecting reserves into the banking system, to keep the FFR in line with their target. In that case, it wouldn’t be necessary for banks to have to go to the discount window; they could still attain them at the lower FFR.

      • Dan Kervick says:

        The way I understand it is this: banks generally don’t like to carry excess reserves, and if the have them they will look to lend them out to other banks. So it’s not as though the bank is going along creating new loans without acquiring new reserves, and then they suddenly hit a wall where they have to start borrowing. They are constantly carrying reserves that are near their reserve requirement, and are constantly acquiring additional reserves as they expand their balance sheet, as part of routine operations. The cost of the reserves is just a sort of routine supply cost per dollar loaned, and is more or less always there.

        The banks are also in a competitive business where their loan rates can’t diverge much from their competitors. So if they do a poor job of reserve management during some time period, and have to borrow more than they expected, or pay some overdraft penalties they didn’t expect, then sucks to be them. But competitive pressures mean they will have to eat the costs and do better next month.

        However, I’d love to hear from an actual banker to see if the above story is right.

        I also wonder how the relatively new world of interest of reserves plays a role here.

        • Госбанк says:

          Dan, in Canada, the reserve requirement is zero, as it is in the UK and some other countries.

          A bank does not need any “reserve” money to give you a loan. The reserve money is needed only when the bank needs to settle its obligations with another bank(s). They are NOT “constantly acquiring additional reserves as they expand their balance sheet”, they anticipate cash inflows and outflows over the interbank pipeline and try and manage their settlement account with the CB as best as they can. It is not an easy task and it’s called “liquidity management”.

    • Isn’t it a contradiction for MMT to argue that people are entitled to a job, but they’re not entitled to a decent interest bearing savings instrument?

      • I’d say that it would be reasonable to state the following… this is not MMT/MMR:

        1) If you’re WANTING to work, an economy not providing you with an opportunity to do so is failing in some form that should be remedied.

        2) If you are saving, a currency issuer offering you worse than slightly negative real interest (-.5%??) is treating you unfairly. I say this because I think somebody should be able to maintain purchasing power less a small “wealth storage” fee.

      • Dan Kervick says:

        Being entitled to a job would mean you are entitled to the opportunity to exchange your labor for money. It’s no free lunch. Being entitled to interest on your money means you are entitled to more money for nothin’.

        But it’s interesting that we have been slumping along with 8% to 10% unemployment and declining real wages, and yet we don’t have the economics profession as a whole saying, “The labor market is screaming for jobs; we must provide those jobs!” But if people with mainly a lot of money are screaming for savings vehicles, I guess we must make that a national priority?

        • I don’t see how that’s not a contradiction. So you want the government to offer everyone a job which will increase demand and inflation which will reduce the purchasing power for savers, but you are against the government offering an inflation protection form of savings? That doesn’t make any sense. Unless you believe the JG would not be inflationary in which case I’ll call BS since every MMTer admits it will at least cause a “one off” inflation.

          This is more MMT double talk.

          • Dan Kervick says:

            Let me get this straight: you want to keep a certain percentage of people unemployed to protect your personal savings against possible increases in the price level? Really?

            But why do you and John Carney believe that increasing employment is inflationary? Don’t people who are working produce more goods and services? Do you think we could get even more price stability by firing another 10% of Americans?

            • Do I want 5 million people to get jobs digging holes so 300 million other people can experience a reduced standard of living through inflation? No. If these people were actually contributing something productive to society then I might change my mind, but governments have proven time and time again that they create more waste than production.

              • “but governments have proven time and time again that they create more waste than production.”

                Thanks for your ideological viewpoint FDO15. It’s really in the spirit of this website.

            • Why don’t you guys just say it – the JG is a moral position. Just say it. You think everyone deserves a job and you don’t care if it hurts the rest of society. Just say it.

              • Dan Kervick says:

                Well, I personally think that everyone who is willing and able to work deserves a chance to contribute and earn his way in society. So yes, I guess I think everyone deserves a job. It’s sad that you think this is some kind of gotcha. I would guess that most people agree with me. But even if they don’t, I like my outlook on life better than that of the the sad, twisted, selfish Austrians.

                • Who ever said anything about not giving everyone a chance? Not me. I just don’t think you should risk the lives of 300 million in order to guarantee that Joe Shmo gets to dig holes every day for $16/hr. Now, if you guys can come up with 5 million productive jobs then I’ll be impressed. I don’t think MMT has proven that the JG will work and I know most people will agree with me about that.

                  • “I just don’t think you should risk the lives of 300 million ”

                    Risk the lives??!! Wow!! Arent we being a bit dramatic?

                    I dont think anyones lives would be risked by a JG policy but people without jobs are on the brink currently

    • Since Tsy typically sells only so many Treasuries are needed to fill the budget deficit, then a shortage of safe assets is a side effect of too small a deficit. But the govt can fund a deficit without selling T-bonds and it can sell T-bonds even if there were no budget deficit.

      As you’ll recall, I suggested last fall that Tsy and Fed divvy this up. Tsy should fund spending in the form of US Notes (i.e. Lincoln greenbacks); Fed should issue its own bonds to provide all the safe assets the market requires. But that would require Congress to change a couple of laws and that sounds awful lot like work. I doubt they’ll ever get around to it. Tsy and the Fed can more or less get to the same place by:
      1. Tsy funding deficits with coin seigniorage. My reading of the Mint Public Enterprise Fund Act is because proceeds are swept into TGA as miscellenous receipts, seigniorage should reduce the deficit (like every other sort of miscellenous receipts). Tsy bean counters disagree, they treat it like a bond sale; the proceeds can fund spending but don’t count as revenue that reduces the deficit. Tsy can change that internally but its really a political issue, not economics.
      2. Tsy stops issuing any T-bond with a maturity date. Perpetual bonds (“consols” as the Brits call then) have one singular virtue. Congress has authorized Tsy can issue them in unlimited quantities. The debt ceiling is a sum of the guaranteed principal on all outstanding Treasury obligations. A consol that never matures doesn’t guarantee repayment of any principal, therefore Tsy consols wouldn’t be included in the public debt subject to limit.
      Since Tsy will no longer be funding the budget with debt, there’s no need to set the quantity and let the rate float. Tsy can fix a rate (or just peg it to annual CPI bump for a 0% real interest rate) and let quantity float. The market can buy up all the Treasuries it requires– $1 billion, $10 trillion, whatever— without having any impact on Tsy’s ability to fund govt operations. The Fed would still have the ability (for what its worth) to do QE operations on the secondary market.

  8. Dumb mechanics question. Is a repo the same as a loan, in the sense of creating horizontal money, i.e.
    Person X has asset A.
    Company Y gets loan from Bank G, and repo’s with Person X (taking the asset A collateral + carry profit). Or Bank G can do this directly.
    Or are most repos not creating horiz money (i.e. MMFs, or reverse repo with Fed)?
    Or maybe I’m just falling into the old “deposits creates loans fallacy” again.
    Thanks!

  9. Looks wrayr got up earlier than you guys on the subject of shadow money (“anything that looks, smells, tastes, or feels like a deposit”) ;-

    http://www.economonitor.com/lrwray/2012/01/26/the-fetish-for-liquidity-and-reform-of-the-financial-system/#idc-container

  10. the power and implications of the horizontal money system

    interesting articles; While debt forgiveness may end up being the prescribed solution, I just don’t see the money elite throwing any “debt Jubilee” parties …

    http://www.oftwominds.com/blogmar12/money-from-nothing-pt1-3-12.html

  11. You make it sound like repo is fundamentally different than selling and buying back on the equivalent timeframe even for liquid things. Is it really? I may be dense but I can’t see the fundamental difference beyond a minor variation on the way transaction costs are narrated. The idea that you still ‘own’ the thing in repo is a bit of a silly fiction. If you can’t sell something you don’t own it operationally.

    • Well, traveling by foot and by car are fundamentally the same – you travel a distance and move through space. But the qualitative difference is staggering.

      This is related to what I am arguing here about money. The speed and comfort of transactions matters. The speed, facility and ubiquity of repos has fundamentally changed how we think about some bond-like instruments. Before the widespread repo market, a corporate bond wasn’t money at all. Today? Well, these same bonds are something close to money.

      One of the things about money is you can sell it at any time, for almost anything you want. You can always sell money. If you think about what you’re doing when you go to the store and buy groceries, you’re selling money in exchange for groceries. You’re like a money store where you offer to sell money at specific times.

      I’d argue this ability to sell something at any time is a huge property of money. They call it medium of exchange, or sometimes liquidity, but what we really mean is the ability to sell quickly, for a known price, with low transaction costs.

      This is what the repo market does for many bonds. This ability to rapidly move into cash for almost zero costs – and cash is well, cash – makes these bonds money-like.

      • Joseph Laliberté says:

        Michael,
        What do mean by “Firms used their recently issued equity as money to purchase other firms.”? Are you referring to stock swap deals, or just using cash from a recent IPO?

  12. paulie46 says:

    This is a test

    anyone
    NFA’s the government spends into the
    non-government are dollars not treasuries. Savings of
    agents that have accumulated dollars are swapped for treasuries and spent
    where they will generate aggregate demand. It’s a kind of re-distribution,
    which in the end is what drives the economy. The non-government cannot
    create demand in this way because the non-government cannot create “net”
    dollars..

    • Well if “In this way” you mean by spending net assets into existence, then your correct, but I’m not sure that reall gets us anywhere. We realize the government is in a unique position and that net-savings are unique assets and should be looked at differently, but the government has implicitly said to the private sector, “you go ahead and form as many contracts around our base currency as you want to result in a productive economy, and we’ll conduct fiscal policy in a way that, in general, expands this to allow for continued stable servicing of these contracts.”

      If the government basically says that, and not “ONLY WE CAN DECIDE WHO LOANS TO WHO,” then the gov’t has handed a huge amount of the power of money over to the private sector… that, or they haven’t taken it out of the private sector… however you want to look at it. So this is kind of like the fed/treasury thing.

      If the fed is given the task of managing the money supply for price stability and full employment, it’s implied that they’d never, ever let treasury bond auctions fail. The fed is not as independent as some would claim, and are essentially quite beholden to the treasury.

      Change a few words around and…

      If the government is given the task of spending enough NFA’s into the economy to allow productive private sector contracts to be serviced, it’s implied that they’d never let these assets dry up and let the economy sieze. The government is not hte monopolist that some would claim, and are essentially beholden to the drive of the private sector.

      • paulie46 says:

        Dan M.

        I’m not making any claims about monopolists or the like. I’m saying that credit cannot fix what’s broken in the current environment.

        We are leveraged out and nothing can extinguish the liabilities beyond net government spending, so all talk about the power of private sector banking is moot.

        Or debt forgiveness.

        • Cullen Roche says:

          No one disagrees that debt is only sustainable up to certain levels….you did notice my 4 years of work on the balance sheet recession, right?

        • paulie46,

          I think we can all agree that now we absolutely need deficit spending. The bigger question is whether more deficit spending during the late-90’s and 2000’s would have actually prevented the housing bubble, as opposed to simply resulted in a healthier economy when it popped.

          If it’s the latter, and not the former, than some people are over-emphasizing the power of vertical money.

          • Cullen Roche says:

            The housing bubble, like all bubbles, was a psychological event. Everyone got greedy….

            • You don’t loan money to peple that can’t pay it back. A fundamental rule of banking.

              What does that have to do with MMT?

              • Cullen Roche says:

                I didn’t even mention MMT. But in your relentless pursuit to defend MMT you keep bringing it all back to it….

                • Cullen Roche March 16, 2012 at 10:30 am
                  The data on loan creation speaks for itself. There is no such thing as “destroying” aggregate debt except in the very near-term. It grows perpetually as long as the economy grows….MMT obscures this point with vague language about net financials assets.

                  :-)

                  • Cullen Roche says:

                    Ahhh, so you just take comments from different parts of the thread in order to defend your MMT crusade. I see. Nicely done there. Can we change your name to “MMT Crusader”?

                    • Cullen…

                      We have two conversations going on simultaneously. I have no need to mention MMT unless you make a comment about it or an implication towards it.

                      If you said something nasty about Paul Krugman he didn’t deserve I might post a defense on that.

                      I’m a math-based organism. I don’t generally join clubs or cliques. Too confining.

                      I like MMT because that was the first place I stumbled across that congealed my life-long thoughts. Thoughts that until then didn’t add up. MMT is like a mother to me.

                      Then I grew up and gave up childish things. I prefer to channel Spock. :-)

    • Госбанк says:

      It’s a kind of re-distribution, which in the end is what drives the economy

      It is not a redistribution in the same way as taxation is because the bond buying agents merely postpone their claims on current wealth, not give them up. The question to what extent government spending stimulates economy is unclear and perhaps impossible to analyze analytically despite some economists assurances to the contrary.

      For the government spending to “drive the economy” in a real sense of the level of influence, one naturally would naturally arrive at the Soviet Union economic framework. Some may consider that framework acceptable, some may not.

      • Cullen Roche says:

        Govt is to be a facilitator in growth. Not the driver.

        • How can the private sector facilitate growth if consumers are massively over-leveraged?

          • Cullen Roche says:

            What is your metric for “massively over-leveraged”?

            • Cullen Roche
              What is your metric for “massively over-leveraged”?

              …the present situation where private debt is roughly 350% of GDP

              • Cullen Roche says:

                Oh, so according to you we’ll be de-leveraging and in need of deficit driven economic growth for the rest of eternity then, huh? :-)

                • Well, if there’s say, $10 Trillion in private debt held by consumers, how long should it take to pay it down since there’s only about $5T in net cash that exists in the non-government and that is held by less than 35% of the population.

                  Rough guess – 5 years of $2T deficits.

                  The question you ask is an arithmetic problem not a political one.

                  You can run some numbers and come to your own conclusion.

                  • Cullen Roche says:

                    And where is your data showing that all loans get paid off? Because the reality is that aggregate debt in the system never gets paid off….

                    • Cullen

                      I haven’t claimed that all debts get paid off.

                      Each loan must be paid back individually. Failure to do so is only tolerated at a very low rate, otherwise the sytem will fail.

                      As we have seen.

                    • Cullen Roche says:

                      You said the water has to be given back. You’re now blatantly contradicting yourself.

      • Госбанк…

        That’s why I said it is a kind of re-distribution.

        Government spending puts the carrot at the end of the stick.

        Target producers with the spending and they will be less motivated to produce.

        Target consumers and the system works as it should.

        It’s interesting how quickly everone seems to jump to OMG!! Socialism!! when we talk about government spending. Most of us would be destitute if the government didn’t spend.

        • Cullen Roche says:

          See, this is where we really disagree. You think the govt puts a carrot out in front of pvt businesses to motivate them….I see the world totally differently. The govt is more like the guy handing water to the runners from the sideline. It’s not holding a carrot out in front of the runners….The finish line isn’t a big pot of govt money. It’s real wealth. Happiness, friends, family, a house with a roof. Govt money might help you get there, but they’re not the finish line. They just facilitate us in getting to the finish line.

  13. “Wray wrote a Levy Institute article about Money, and Rochon wrote a paper about money too. They are missing something massively important from their analysis of money – the existence of money-like securities and instruments which are widely used in the financial world.”

    Wray discusses this issue in the paper “Money in Finance”:

    http://www.levyinstitute.org/pubs/wp_656.pdf

    Other related publications:

    Minsky/LR Wray “Securitization”
    Wray “Deficits, Liquidity & Schumpeterian Innovation”
    Wray “What Should Banks Do?”
    Wray “Finance, Saving, Deficits, Liquidity”
    Wray “Integrating Credit, State, Endogenous Money Approaches”
    Wray: “Endogenous Money ”

    Further Levy Institute Publications by LR Wray:
    http://www.levyinstitute.org/publications/?auth=287

    Related Books:

    Wray/ Forstater: “Money, financial instability and stabilization policy”
    Papadimitriou/ Wray: “The Elgar companion to Hyman Minsky”
    Wray: “Money and Credit in Capitalist Economies”
    Wray: “Credit and State Theories of Money.”

  14. Cullen Roche
    See, this is where we really disagree. You think the govt puts a carrot out in front of pvt businesses to motivate them….I see the world totally differently. The govt is more like the guy handing water to the runners from the sideline. It’s not holding a carrot out in front of the runners….The finish line isn’t a big pot of govt money. It’s real wealth. Happiness, friends, family, a house with a roof. Govt money might help you get there, but they’re not the finish line. They just facilitate us in getting to the finish line.

    Where does the water come from?

    If the government didn’t inject dollars into the non-government, the businesses /producers you speak of would have no one to sell to.

    This is where we disagree. It’s been obvious from the beginning. Just waiting for you to recognize it. :-)

    • Cullen Roche says:

      See, the thing is, there are these big water trucks along the route where the runners can also stop and drink. They have to potentially waste time and take risk to stop there, but these big trucks supply most of the water to the runners. They’re called banks. I’m just waiting for you to acknowledge that they do much more to sustain private growth than the guys holding out the little water cups.

      • If they were banks they would have to give the water back before the end of the race.

        Those are state water trucks. The runners get to keep the water.

        • Cullen Roche says:

          Money multiplier argument again. Fail.

          • There is no money multiplier

            • Cullen Roche says:

              Fine, loan “destroyed” argument. Still a fail.

            • Cullen Roche says:

              Unless the first chart I posted by the St Louis Fed is wrong (or your own 350% data point is wrong) then your theory that the water gets “given back” is 100% wrong. You’re taking a case of micro and extrapolating out to macro! It’s very funny to see an MMTer do this since they trash other people for doing it all the time.

              Unless of course you actually believe the debt fear mongering about how we’re going to be de-leveraging for the rest of eternity…which it seems you do….Never mind that household and business credit growth is accelerating again….MMTers latched onto the balance sheet recession theory just when I was expecting the BSR to end….

              • paulie46 says:

                Cullen

                I haven’t looked at the source of your chart yet but I posted the other day from FoF z1 Table L.1 showing total credit as $54 Trillion, which is substantially more than your graph indicates.

                Household debt was about $13.2 Trillion.

                Home mortgages $10.3 Trillion.

                Steve Keen also claims $350% of GDP for provate debt (a horizontalist, bless his heart). :-)

                • Cullen Roche says:

                  The source of that chart is an entity called The St Louis Federal Reserve. My sources tell me they’re an authority on this data. :-)

          • Exactly…

            The banks don’t lend and people don’t enter financial contracts based on the base-money already in existence.

            The banks lend because the government has implicitly told us that it will create an environment, through plentiful deficit spending at the right times, that will service the most productive of these contracts IN THE FUTURE.

            That means the private banking is driving the growth, and the government is just supplying (hopefully) whatever NFA’s the market demands at the time to service contracts of the past and prevent self-fulfilling economic collapses. Hence the term, “facilitating.”

            Since the FUTURE expected NFA’s from government, not the PRESENT NFA’s, are what the private sector expects to act as the proper buffer/lubrication to their contracts, then if the government basically admits they’ll oblige the private money system, they’re much like the Fed “deciding” to make sure treasury auctions don’t fail. It’s built into the very core of what they do, and therefore congress doesn’t worry about buyers of bonds when deciding how much to spend (and banks/borrowers/private-sector players don’t worry about NFA’s in existence when they engage in financial contracts).

  15. Dan M.

    Seems like you’ve got it about right.

    However, when the credit system is locked up as it is now, a promise to spend in the future doesn’t cut it.

    Then the question becomes “How Much and Where”?

    • Cullen Roche says:

      Why do you keep saying the credit system is “locked up” when private credit has been growing for several quarters now?

      • paulie46 says:

        Cullen

        Your own graph up-page shows credit as being locked-up.

        Get back to me in a year and we can re-visit the argument.

        • Cullen Roche says:

          2 years in 70 years of data now prove that credit gets “destroyed”. Ha. Come on Paulie. You can’t be serious here….The loans don’t get “destroyed”. You guys were wrong. Just admit it.

          • paulie46 says:

            Cullen Roche
            2 years in 70 years of data now prove that credit gets “destroyed”. Ha. Come on Paulie. You can’t be serious here….The loans don’t get “destroyed”. You guys were wrong. Just admit it.

            70 years of data registering activity where incomes were steadily rising and people were able to borrow and the government obliged by spending. Then the rocket ran out of steam and started heading back to earth. Lets see how the next few years shake out sans bigger deficit spending, then revisit the issue.

            What part of destroyed don’t you understand? Every payment destroys dollars. That is irrefutable. New loans create new credit. Creating new loans at a rate faster than the rate of payment expands credit. Basic stuff.

            Expanding credit beyond the ability of borrowers to repay has a natural limit and we have reached it.

            So simple a caveman can do it.

            Please spend some time studying the 2nd Law of Thermodynamics then get back to me. Your arguments have the force of the natural world against them. I don’t think the universe needs me as it’s proxy in this case. :-)

            • Cullen Roche says:

              I love how MMT has latched onto the BSR work and claimed it’s permanent in an attempt to push the MMT policy agenda forward. The last 12 months already prove you wrong. And now your inaccurate arguments have been boiled down to “just you wait Cullen!”. Ha. Yeah, I hear that from hyperinflationists austrians every single day.

              I keep throwing data at you and you keep coming back with snide remarks and MMT talking points. Your comments are just obfuscation mixed in with cleverly worded insults. Par for the course for an MMTer. The words “I was wrong” would really round out your vocabulary nicely.

    • Haven’t we all agreed on this? This isn’t about whether we run deficits now, it’s about what truly drives our economy MOST of the time, and what the nature of the roles of credit and base money are MOST of the time.

      I’m quite sure MMT & MMR would agree that we need large deficits right now.

      The reasoning isn’t JUST the private-debt-to GDP ratio, but the relation of our non-financial asset balance to our financial balance sheets. Things were a lot easier on our financial balance sheets when we thought our homes were worth 40% more.

  16. paulie46 says:

    Dan M.

    No, we haven’t all agreed on this.

    Credit is not a sustainable way to drive consumerism. Agents must earn money before they spend it.

    Granted, some long-term purchases need to be financed (like housing) but it appears now that we have reached the end of that line. The future looks more and more like rental housing.

    Private sector borrowing to spend is a fools errand. In order to “have it now” we are willing to have “less of it”. Lot’s less.

    Businesses can use credit to expand when the demand is there. Businesses do not create their own demand other than compete with other businesses for the dollars that are available for spending.

    If we don’t have deficits when the economy needs them then credit won’t help us.

    • I think I’ve thought of a way of describing in a better-visualized way the point I’m trying to make about productive assets and sustainability. Think for one quick second about the 1800’s when many forms of money were simply IOU’s circulating around town… a claim on someone elses time, silver, or production. There was not necessarily government-issued-fiat-currency as any part of that money.

      Now imagine today, all the securitized forms of debt that make up the private sector… yes, they’re serviced with dollars, but they also contain a contractual claim on the productive assets themselves, making them quasi-sovereign of the domestic currency, because they have a contractual securitization (just as 1800’s currencies did) along with the monetary servicing of the contract.

      The horizontal sector is obviously very private in nature, because it’s not just built on fiat currency, but the promise to relinquish Non-financial assets. This means this money can function independent of vertical support for a long, long time, and is probably much more driven by hiccups in the value of the nonfinancial assets that ground it than the NFA’s that service it.

      • paulie46 says:

        So you’re making an argument that our economy was as robust in the 1800’s as it is now?

        • I am no Austrian, man… by any means. They give me a massive headache… I can actually talk to you, unlike them, on a reasonable level :).

          I’m merely pointing out that IOU’s functioned as money during that period. This means that money was built on a structure of non-financial assets and the contracts that monetized them.

          A good chunk of the horizontal level today functions much the same way…. using claims on nonfinancial assets to make them a quazi-private system of money on their own, simply serviced by vertical money.

          I am surprised you read all that and could only come back with a statement trying to accuse me of assertions about the 1800’s. I’m simply showing the fact that certain horizontal money that’s serviced by $$’s is quasi-sovereign, as long as our gov’t will continue to enforce contracts (uh oh, is this getting me in a trap where I’m admitting the gov’t is the monopoly-issuer of currency (facepalm)).

          Basically, imagine that people used the deeds to their (unmortgaged) homes as a medium of exchange. This is unnecessary, but quite imagineable. Outside of enforcement of contracts, would you say that the gov’t has any control/influence on this money? No. Well many mortgages have that element to them. Collateral makes horizontal money quasi-sovereign of fiat currency, and allows the private sector to function smoothly for a long, long time with what might appear to be too few NFA’s, and will most likely only fail when we hit an event where we realize we drastically over-valued the collateral of the private money.

  17. NFA’s are just credit of a different kind. The only reason the gov’t can “print” assets is because there are times when we are under full capacity and more spending doesn’t result in inflation, and the private sector will not do that spending.

    The most unsustainable part of credit is a having too many financial assets to the amount of non-financial assets. As long as there are productive assets in the economy, and we can build more of them, things are sustainable.

    You seem to be saying that NFA’s are what stabilize things first and foremost. That’s not true. Productive real non-financial assets are the meat of our economy, and, therefore, the stability of financial assets/liabilities.

    • This was supposed to be a response to Paulie.

      I’d also add that notice how we were being drained of NFA’s from 1997-2008, but only when the NON-financial assets dropped significantly in FMV (tech company worth and housing prices) did the economy lock up.

      So the “unsustainability” is obviously driven just as much, if not much more so, by the non-financial assets (and the horizontal money they secure) than by the NET financial assets.

      This implies to me that the true driver of the sustainability of debt is real production and wealth, and that NFA’s play a secondary, supporting role.

      • paulie46 says:

        Dan M.
        I’d also add that notice how we were being drained of NFA’s from 1997-2008…

        Drained in what way? Deficit spending (in relative terms) was staggering over that period.

    • Paulie,

      I have to keep rambling… cuz this is really drilling down for me. Whenever debt is looked at in analysis, it’s never looked at in a vacuum, but how it relates to production. Are you really trying to argue that the paper vertical assets of government, not production (or potential production) are the true drivers of “sustainability?”

      I think we all agree that currently, due to demand for Net Savings, gov’t is a big driver with NFA’s, but this is just a healing balance-sheet patch to cover the hole that the housing crash left. It’s hardly the fundamental driver of sustainability.

      Private and public money (horizontal and vertical) work together with their traits to create a stable monetary system, but the TRUE driver of sustainability are the things CR has mentioned… REAL things that people value… time, shelter, recreation, safety, etc. Real production provides this… financial assets/liabilities do not.

  18. paulie46 says:

    Dan M. March 16, 2012 at 1:49 pm

    Are you really trying to argue that the paper vertical assets of government, not production (or potential production) are the true drivers of “sustainability?”

    Sustainability refers to many different things depending on the context.

    In the context of the economy in general, creating demand by borrowing in anticipation of future income is risky, because future income is uncertain but the liabilities that come with credit are certain.

    How many times have you borrowed to buy something you thought you really wanted only to find out the thrill of the moment was outlasted by the reality of the payments. At that point it’s too late because most of the time what you have bought isn’t worth nearly what you paid for it.

    As far as production is concerned, whatever is produced relies on cash to monetize gains, otherwise gains will have to be at the expense of other agents in the economy. This is the musical chairs framework that we are now experiencing. Homeowners got stuck when the music stopped. Banks should have been stuck also but the PTB wouln’t allow that to happen.

    So now we are where we are. I say it’s stalement and slow going. Cullen says no problem, business will bail us out. We’ll see soon enough. We are still spending at a clip of about $1Trillion/year so maybe that is enough to keep us afloat and stave off mutiny. At this rate it may take 10 more years to fully recover.

    Money flowing into the non-government can flow very slowly, like an hourglass, or we can speed it up by increasing the deficit. Once we reach balance the private sector can take over the reins, but as long as we allow massive wealth accumulation by the few along with large external deficits we will have to run large deficits. Or impoverish millions of people. When your kid doesn’t make the Little League team he doesn’t starve to death, and we don’t (if we are decent parents and citizens) consider him a loser.

    This view is based on nothing more than simple arithmetic.

    Credit allowed production to expand beyound our ability to monetize it, so we end up with massive inventory problems for the objects of production.

    • Cullen Roche says:

      Paulie,

      I never said “no problem”. For the last 4 years I’ve been working under the framework of the balance sheet recession and excessive pvt debt. MMTers latched onto my work in large part because they knew this was a way to further many of their points. But the BSR isn’t lasting forever as we’re now seeing credit coming back. We were in this really brief period of history where private credit wasn’t the driver of growth. But that’s changing. You can’t take a few years of history to try to prove what hasn’t been true over 95% of the last 100 years….

      You’re cherry picking and obscuring the terminology in order to prove your inaccurate position that the economy revolves around the state….It’s not working and we’ve proven that you’re wrong….using your own points to do so….You pretend to be a math based guy. Well do that math on 7 trillion minus 28 billion over 70 years and tell me how that adds up to the pvt sector “destroying debt” or “giving back the water”. http://research.stlouisfed.org/fred2/data/LOANS.txt

      I think you’re blinded by MMT and refusing to admit that you have this wrong….

      • paulie46 says:

        Cullen

        The only problem here is your distaste for “the state”.

        I don’t care which solution solves a problem as long as it works for everyone as fairly as possible.

        I don’t believe the free market can provide for the majority’s needs.

        I don’t believe in the efficiency of the private sector (any more than I believe in the efficiency of government). Some things government does very well, other things not so much. In the private sector, provided it hasn’t captured the government, a business will fail if it doesn’t compete well.

        Both are populated by human beings with the same human weaknesses. Nether can be trusted in any way to do the right thing.

        Unfortunately we don’t have a system that allows competition to take place – we never have. So what we have is powerful groups dictating to us what we can have or not have and who or who will not succeed. The only way not to lose is not to play.

        I have little faith in your worldview. Mine suits my sensibilities better and has the added bonus of being based on natural law as best as I can apply it to the problems. Time will tell which one of us is better at interpreting reality.

        I am able to accept reality when it tells me I am wrong. I don’t need you to be a proxy for reality, it doesn’t suit you.

        You guys are making me objectively pro-meteor.

        • Cullen Roche says:

          Here we go again. Now I hate the state. Yes, I personally have proposed a trillion more in deficit spending and I hate the state. I think the govt should regulate the banks more heavily and I have distaste for the state. Why don’t you just go where you’re naturally heading and accuse me of playing politics so you can build up your own politically charged argument by trying to tear mine down?

          I am all in favor of govt actively facilitating economic growth. I just understand that govt doesn’t drive most growth. It’s not holding a carrot out….What’s the point. You’ve been pure MMT since day one (despite claims you’re not). You’re not changing. That’s fine. Good luck with it.

          • paulie46 says:

            Cullen

            …Why don’t you just go where you’re naturally heading and accuse me of playing politics…

            I hate politics. Very unpleasant. It’s the sludge we have to crawl through to get things done, and I hate that too.

            I won’t accuse you of being political because I really wouln’t know what it means.

            What I do know is we have very different worldviews and I can live with that.

            Last time we spoke (wrote words at each other) you said we had a lot more in common than not. I will agree with that.

            But I don’t spend my time discussing things I agree on with people. I work around the margins, trying to make my points because I think they’re worth making.

            None of this is personal. If I had to agree with everyone to have friends I wouldn’t have any.

            I don’t even agree with my wife, although I have learned to keep my mouth shut with her.

            Her gain is your loss. :-)

    • Paulie,

      The private sector only needs cash to monetize gains long enough to engage in the transaction, until and after that transaction, the parties involved can go back to investing their $$’s into other horizontal savings vehicles as those base dollars are spread back out amonst the economy.

      The only problem comes at time of deleveraging where the cash isn’t spread back out but hoarded.

      This deleveraging often happens not as a result of too little cash, but nonfinancial assets crashing in value, weakening the horizontal money and demanding quick servicing of balance sheets.

      Let’s imagine that the private sector dreamt up debt instruments in $1,600 increments that were serviced with cash at 3%, but collateralized by one ounce of gold held by that person in their portfolio (easier to think of as a liquid, fungible REAL asset than a factory). The status of this debt will hold up, most likely, not based on the amount of NFA’s in the economy, but the value of that collateral. If the economy started to love these things, and the price of gold dropped from $1,600 to $1,100, that would be a huge weakening event for this private currency, creating more demand for the real thing to repair balance sheets, creating a “hoarding event.”

      This is what happened with housing. What we essentially have out there is a system of private money that is built on two pillars: One is the dollars that service it, and the other is the non-financial assets that secure it. These are in effect claims on real asssets, just like the IOU’s of yester-century, if you look at them at the right angle and forget about the NFA’s that are required to service them.

      We did ok for a century with this money (oh god I sound like an Austrian now), but not good enough… the private sector demanded NFA’s to help stabilize things at the right time. But lets not forget about that part of the contract, because even if you pulled the part of the mortgage contract out that said “pay 5% interest,” you’d still have the part that says “we will take your house if you can’t pay.”

      Obviously banks aren’t in the business of rentals or factory-management… but neither were IOU holders of the 1800’s… they just wanted something that could act as money, and the threat of claim on the asset did a pretty darn good job of turning that contract into money… just as the strengthen our private money system to this day.

  19. paulie46 says:

    Dan,

    Saving, hoarding and profit-taking are constant problems and must be accounted for.

    • Yes, Paulie, but “hoarding” NFA’s happens not just for the simple reason that there aren’t enough NFA’s out there (we’ve all agreed we should be sending them out now), but due to a significan’t weakening event of private collateralized money contracts.

      This happens when nonfinancial assets are mispriced and come back down to earth.

      This means that the strength of the nonfinancial assets we engineer are just as strong if not more strong of a cause of weaknesses in our system as not enough NFA’s are. Like I said, only when REAL assets fell in price did our system feel parched of NFA’s. That drove the hoarding event much more than the running balance of domestic NFA’s along that period did.

      • paulie46 says:

        Dan

        You make things way more complicated than they are in reality.

        People “hoard” because they have to provide for income in their non-productive old-age years. OR

        They hoard because they love status or power. OR

        They hoard because it’s a game and the one with the most toys when he/she dies wins. OR

        Big corporations hoard because they are insecure and feel the need to protect themselves from other corporate parasites. Or …

        Why do you think Apple Computer has accumulated $100 Billion in cash? Think they need the money? They don’t even pay dividends. The cash just sits there and soon it will double, then triple, then…

        btw, the government printed every penny of that $100 Billion and Apple doesn’t have to give it back.

        No one could hoard if the government didn’t net spend to fulfill the desire to hoard.

        Hoarding would collapse the economy on itself like a dying star.

        • This isn’t about whether we shouldn’t be supplying the economy with net savings… we should… but it’s about the ROLE of the horizontal sector vs the vertical in the economy. Yourself and MMT tend to give it a 70/30 vertical vs horizontal weighting of influence. Due to the power banks have to attach loans to collateral and set the price and not be reserve constrained, MMR’s maybe put it more at 65/35 towards the horizontal vs vertical.

          That 35 from the vertical component is incredibly important, but it’s the 65 that drives the economy, and can drive the price & demand for different sorts of financial assets for over a decade without flinching.

          • paulie46 says:

            I’m not sure whee you pulled those numbers from. At any rate I don’t think of things in those terms.

            I suppose I need to have an MMT tattoo put on my forehead so I can’t sneak up on people. Gues I will have to tell Rodger Malcom Mitchell to do it too because he has MMT sensibilities that he came upon through no help from the community.

            My view of the economy and the flow of funds is much simpler than yours. I don’t care which is more important, horizontal or vertical. I know that both are necessary for proper functionimg of the economy.

            My goal is to be able to understand and define where the problem lies and then think about possible solutions. I have pointed out several times what is wrong and what it will take to fix it.

            You seem to agree but also fear that once “fixed” we MMT :-) borg types will want to convert America into a socialist paradise. Me, I’m too old to care but that looks like where the world is headed so hold onto your hat, the ride will be rough for you.

            Young people on the other hand seem quite amenable to the idea of socialism.

            • I’m voting for Obama, no question… and the ratios were just picked out of a hat.

              I simply think that looking at vertical money as being an e-brake and not the rudder on a titanic is a big oversimplification of the system. I used to think CR was splitting hairs on MMT vs MMR, but the visualization of the system is key. To visualize horizontal money as spring from and beholden to vertical money is a mistake.

              Simply put when you have a system of credit, ESPECIALLY when it’s collateralized, NFA imbalances can take a long, long time to manifest themselves. Telling us that “eventually” not enough NFA’s will be a problem is like Austrians telling us that “eventually” the dollar will collapse… though the former is slightly less ridiculous, it still doesn’t drive investment.

              For instance, if we’d slashed taxes and run huge stimulus before 2008’s crisis, we very well could have avoided many of the systemic problems that have ensued. However, the same could be said if we’d simply run bigger deficits all along the way from 1997-2008, instead of all at once, resulting in similar balance sheets at the end of the line.

              Anything with that degree of imprecision needs to be taken for what it is… one consideration of many in modern money… definitely not the “driver” of money & the economy.

              Right now, however, spend away… slash taxes… I’m in agreement.

              • Cullen Roche says:

                +1

              • paulie46 says:

                [rant on]

                Unfortunately voting for Obama is voting for the status quo, at least for some of us.

                Both legacy parties are owned lock stock and barrel by special interests and big money.

                This is where I get political…voting isn’t going to change anything, the game is rigged and we are the losers.

                Electoral politics does not have the capacity to change things anymore if it ever did.

                It will require people to refuse to play (remember when I said the only way not to lose the game is not to play?) and get involved in community-based activities. Become self-sufficient. See here for one example:

                http://stream.aljazeera.com/story/rise-maker-movement-0022086

                Use as little of the establishment as necessary to survive, do everything you can for yourself. Educate yourself. MIT has it’s entire curriculum online for free. Others will follow.
                The internet is a treasure trove of information. One could never go to school and end up more educated than 95% of the population.
                Screw the rentiers.

                [rant off]

                • [Rant on]
                  If you’re going to accuse people of being childishly anti-socialist or anti-government, don’t jump down their throat when they point out they’re voting for a democrat.

                  I agree that he’s the status quo. However, what else do we have? The only one outside the mainstream is Ron Paul… who I respect… but in now way, shape or form do I want a gold bug deficit hawk as president.

                  Maybe I’ll vote for Warren Mosler if he runs… I was just trying to make a point.
                  [Rant off]

            • Cullen Roche says:

              Young people are always democrats looking for ways to make the world a perfect place where the govt provides equality for everyone. Old people are generally republicans who have given up on making the world a perfect place and get tired of believing the govt can fix all the world’s problems. That generalization is as old as time and it will always exist in some form or another. Is America becoming more socialist? Maybe. But you can’t change the primary driver of living standards no matter which direction we’re headed. And that’s efficient resource utilization.

              • Ironically, old people would fight to the death for the two biggest gov’t programs in existence… SS & Medicare.

                • Cullen Roche says:

                  Govt can do great and important things when used properly. I think that’s totally in-line with our perspective. But taking care of our elderly and things like that are very different from providing a productive economy that increases the living standards of every citizen and future generations….That’s a largely pvt sector thing. Govt can help though and we should leverage their powers!

                  • Agreed 100%. I don’t have a problem with SS & medicare in most ways. I just don’t like Tea Baggers who think it’s not a gov’t program, while complaining that the gov’t shouldn’t pay for the college tuition of young, smart, hard-working poor kids.

              • paulie46 says:

                I’m old and for most of my life was a Republican. Obama was the first democrat I ever voted for. My wife is a life-long Democrat. She is too conservative for me, so I guess that makes me a progressive but true progressives don’t really exist in large numbers.

                I score closest to a left-anarchist on the Political Compass test. I’m practical enough to know that won’t work in a complicated society like we now have.

                I have no use for either legacy party but the Republicans are toxic as currently organized. The worst elements of society have co-opted the party.

                Neither group makes any sense to me any more. Neither one stands for anything that matters to working people and neither has any principles you could see with a microscope.

                Parties don’t matter anymore anyway. Everything is decided behind closed doors and the voter is an inconvenience.

                I don’t want a return to the Wild West or the Gilded Age, nor feudalism.

                What we have doesn’t work anymore. That system is failing faster than most think. Just depends on how long it takes for the sheeple to wake up.

  20. paulie46 says:

    Dan

    “…nonfinancial assets crashing in value…”

    This is only a problem if you lose your job. Your car crashes in value as soon as you drive it off the lot. Nothing bad happens unless you lose your job or otherwise can’t make the payments.

    • It’s not only a problem if you lose your job. First, the balance sheets of Americans were hit after the 2006 housing peak. As that happened, even employed people found it more necessary to deleverage the loan involved to a reasonable level, all the while the existing mortgages and contruction jobs were appearing unstable and sparse, respectively.

      Then the hoarding event horizon occured.

      This was all brought on by a crash in real asset prices. CR and I agree with you that higher deficit spending would have been a tool to soften the blow at the time, but it’s truly the housing price crash that drove the fundamentals of the crisis.

  21. paulie46 says:

    Dan,

    A crash in your balance sheet didn’t bother me one bit (but I hope that didn’t really happen to you). I can’t see your balance sheet from my house.

    Why did balance sheets crash?

    Why did the housing market crash?

    Why did unemployment go up 5% in the US and scream higher worldwide?

    Why does the economy still suck?

  22. Why did the balance sheet crash: Houses were over valued and the market realized it… this subsequently weakened the value of stocks and even the bonds that were supposed to be safe being paid off by homeowners.

    Why did the housing market crash: Covered… market realized it was too expensive in 2006 and adjusted it down.

    Why did unemployment go up 5%?: Some structural issues, but mostly because people started to try hoarding dollars to repair their balance sheet.

    Why does the economy still suck: Some structural issues, but also largely because we haven’t run large enough deficits.

    A crash in my balance sheet may not have bothered you, but it’s what induced the hoarding event to repair balance sheets. I agree bigger deficits would have helped patch this demand, but running bigger deficits wouldn’t have prevented the boom & bust in housing as some MMT’ers have suggested. Also, if instead of housing we’d invested more properly accross the horizontal sector in more sustainable nonfinancial assets, I don’t think the hoarding event would have occured, signifying that the lack of NFA’s is only a small part of the story of 2008.

    • Maybe I didn’t point out enough that when balance sheets crash people divert funds accordingly to repair them. This can weaken horizontal wealth and create a hoarding event. This means people are now spending a lot less and demand goes down, weakening the horizontal financial wealth even more.

    • paulie46 says:

      Dan

      I think you are way off the mark here.

      Balance sheets crashed because people that bought houses they thought they could roll over and make a profit on got stuck with them because others that bought homes they couldn’t afford began defaulting at high rates – because banks didn’t do due diligence aka underwriting.

      Everyone that could afford a house and many that couldn’t had one and there was no one left to sell the inventory to.

      The housing bubble popped and the construction industry collapsed almost overnight. Construction is where the jobs went to make up for all the jobs we sent overseas. Now we had high unemployement and many people had to stop consuming.

      Downward spiral.

      Screw the stock market. The stock market is a big scam that does little to help the working man. If Microsoft went to $1.00/share they would still be making a ton of money as long as their products were useful. The only ones losing would be the rentiers. The rent is too damn high.

      You know what creates jobs? Having a job and having money to spend. Then every entrepreneur in the world will be crawling down an alley full of broken glass to get those dollars. Whatever it takes. Carrot at the end of the stick.

      The rest is supply-side BS. Anti-gravity BS.

      Is that politcal? I say it’s calling it like I see it.

      • Paulie… pardon my mentining of the stock market… I think it was a pretty small part of it, but as part of peoples’ retirement portfolios, I think it did have an affect on spending. I think overall, the weaknesses in housing started a hoarding event that weakened other stocks & bonds (horizontal financial wealth). I mean really wasn’t the financial collapse one big bond market failure (MBS’s)?

        You’re almost implying that simply keeping people employed would have prevented housings collapse… I agree that there’s a chicken/egg element here, but the fundamentals of housing simply were not there. The housing bubble is what really brought everything else to bare. It wasn’t a problem of the gov’t not hiring enough people in 2006 and then a precipitating housing collapse. Prices should have dropped. It was bound to happen unless we simply tried to inflate the rest of the economy around housing. Yes, now we’re in a self-fulfilling mess, but it initially started as a huge asset price bubble pop, not unemployment or too little savings (two other large problems, but not the driver of the crisis).

        I agree lowering unemployment at this point is a priority and deficits are a huge piece of that… probably the biggest single piece. However, NFA’s would not have prevented the housing bubble from growing. They wouldn’t have prevented it from popping. They simply would have calmed the hoarding event and kept things more stable so housing could fall, certain bonds would fail and it could be a less systemic event.

        • paulie46 says:

          Dan M.

          This is going to have to be my last comment because, well, I kind of have a life although you wouldn’t know it today. :-)

          Are you aware that the dollar losses where much larger when the dot-com bubble burst than the housing bubble?

          Why do you think that is?

          • Dollar losses of what? I’m intrigued with what you’re getting at but don’t know what to compare to what.

            • paulie46 says:

              Take a look at the wealth lost in the dot-com bubble bust and compare it to wealth lost in the GFC.

              Why didn’t the dot-com bust end up in a depression? The business I was working in at the time didn’t even slow down. I worked in an architectural office and we stayed 2-3 months behind all the time we had so much work.

              In 2007 we went from 19 employees to 5. Then none. All of our clients are doing something else for a living now, the ones that are still alive. I see a few of them (contractors) every now and then working at Lowes.

              • Probably because balance sheets were healthier in 2001, stocks are a less central piece of the household balance sheet than homes are (so the losses were probably felt more by the wealthy in 2001 and everyone else in 2008), and tech jobs lost to a tech crash are probably a lot less than construction jobs lost to a housing crash.

                To be honest, though, I’m surprised we lost more wealth in the .com bubble than in the housing bubble. I mean looking at the percent decline of the stock market… and then add housing to it? 2000 had a falling stock market through 2002, but homes were increasing in value during that time. In 2008, if you count the loss in home value since 2006, look at the stock market and even parts of the bond markets I’m really surprised of your assertion… Do you have some info showing that?

                • Cullen Roche says:

                  I think this comment is telling:

                  “You know what creates jobs? Having a job and having money to spend. ”

                  This doesn’t tell the full story. Keynesians like to focus on aggregate demand. Supply siders focus on production. MMRists focus on BOTH. They are two sides of the same coin. You can’t just say jobs exist, have money to spend, create demand, game over. You have to understand why people demand things, why certain things create better living standards, etc. You can’t have consumption without production. I don’t know what the tug-of-war is all about. The point MMR makes is that they’re two sides of the same coin, but that production ultimately increases the size of the coin. Some MMTers think we can actually live in a world where we don’t even produce anything and just import everything from our hard working neighbors….Boy is that a recipe for lower overall living standards or what.

                  • paulie46 says:

                    Obviously I disagree.

                    In the future a relative handful of people will be able to produc enough stuff to supply every one else.

                    What will people do then?

                    • Cullen Roche says:

                      This is Volney’s Natural Law. Man doesn’t want to just sit on a couch being served grapes. Maybe the weak man does. But most men do not want that. They want to live a meaningful and fulfilling life in which they give back to their fellow man and prove their worth to those within society. This mythical world where we all sit around being served by robots will never exist. When the robots serve us grapes for dinner I will be able to spend more time finding other more fulfilling things to give back to society. Just like when all the messengers freaked out about the telephone. Oh no! This robotic machine that sends messages is going to put us all out of business! Oh no, the washing machine means all the clothes cleaners are out of business! Oh no, the automobile means we don’t need carriage buggies anymore! We destroy jobs through innovation and find ways to utilize the increased time to demand or create more goods and services. This mythical world where we sit around being served by robots is just that – a pure myth. It is innate in us to produce and prove ourselves to one another. And if we ever change I hope I am long gone because I don’t want to live in a USA where everyone wants to sit around being served grapes by robots and doing nothing else….

                      A man proves his worth to society through what he produces. Not what he consumes.

                    • paulie46 says:

                      I didn’t say people would want to sit around being served grapes by robots.

                      Some might. If individuals want to waste the only life they have than so be it. But I don’t wish that on anyone.

                      There just won’t be any work, so people will do the things that please them.

                      I might build sailboats and sail the Caribbean.

                      Fortunately for me I love what I do. So it isn’t work in a sense. I feel for those that have to work doing meanless things that doesn’t challenge them.

                      But there won’t be an economy in the way we know it. and increasing productivity only brings us closer to that world.

                    • Cullen Roche says:

                      The only way there won’t be any work is if people can’t think of things to do that add value to the lives of others in society. Personally, I don’t buy into the idea that we’re on the road to becoming a bunch of robot dependent hermits.

              • I’m not a graphmotologist or anything, but depending on where you start/finish, one could argue that 2008 was quite a bit worse.

                Especially when you consider the systemic nature of big shocks vs little shocks probably being exponential.

                http://en.wikipedia.org/wiki/File:Graphic.png

  23. Госбанк says:

    paulie46
    Госбанк…
    It’s interesting how quickly everone seems to jump to OMG!! Socialism!! when we talk about government spending. Most of us would be destitute if the government didn’t spend.

    Perhaps, some empirical evidence from the former Soviet Union and its 15 Eastern block allies “makes one jump to OMG” ? They had full employment guarantee along with criminal punishment for choosing not to be employed.

    Just for the record: the government does have its place, but not to the degree you seem to believe it should.

    “Most of us” in this country do not rely on government largess to make a living. If you mean “most of us” employed by the public sector, then you might be right.

    • paulie46 says:

      If the government didn’t provide public jobs for some many of us that depend on the private sector to make a living would not have a job either. It becomes a downward spiral.

      Less than 90% of our workforce produces everything we need and then some for the rest of the world.

      Why would any business hire anyone of the remaining 10%. It would be inefficient and probably cause many business failures. Should we denigrate those that aren’t needed because they don’t “measure up”?

      Some people, just by nature of their skillsets or lack thereof combined with antisocial personalities are unemployable meaning no employer in his right mind would hire them. Should they starve or live on the streets so we have to step over them to get to work?

      Same thing goes for people living on unemployment, welfare, disability, social Security. Transfer payments to those groups are a net benefit to the working man. It increases our income and makes us better off.

      Florida is very much like Greece. An economy based on tourism and kids drinking beer. Not very productive, all we produce is a good time. Can’t have that. Should we treat Florida the way Greece is being treated? Get rid of most of it’s public employees. Teachers, policemen?

      Government employment is as much a part of private sector well-being as your heart is to your well-being. Try living without your heart for a while.

      You have no idea what I think a government should be doing. I have an idea what we shouldn’t be doing – bombing innocent women and children and putting miliions of our own citizens in jail or prison for victimless “crimes”.

  24. Dan Kervick: However, I’d love to hear from an actual banker to see if the above story is right.

    The way banks work is that they do NOT care about the cost of reserves at all. This is a bit contrary to what Warren tends to say but I always used to take it a rhetorical tool and a simplifying approach to otherwise complex topics. However, the discussions here show that MMTers really tend to oversimplify the real world because later they forget about it completely.

    Anyways, in every bank there is a unit called ALM (asset-liability management or sometimes it is called treasury) which is the central unit for pricing of internal funds. This unit defines a yield curve internal to the bank to which all individual assets and individual liabilities are linked based on their respective maturities. In the definition of this internal yield curve there is nothing called target rate or discount rate or whatever. But even if there is, it would not matter much. Simply because banks do not carry any assets or liabilities which have maturities relevant for the base rate or discount rate.

    • Ok fine, interesting nuance, but obviously there are going to be other factors influencing the internal yield curve precisely because assets/liabilities are going to be at different maturities than the base/discount rate. This goes without saying. It’s the most basic finance concept. that there are other premia involved. But the risk free rate is going to drive that yield curve, and that’s why in the classroom, whether MMT or any other economic school, the teacher will oversimplify a bit and reference most of the discussion to the risk free rate.

      • wh10, abstracting from the rest of complexity, the risk free yield curve is not the same as the target rate. Does the Fed define the yield curve? No. Who defines the risk free yield curve? The horizontal private sector :)

        • Sergei you’re missing the forest for the trees. At the end of the day, the horizontal private sector is not going to drift very far, particularly at the short end of the curve, from the target rate, for several reasons. And if the Fed wanted to exert more control at the long end of the curve, they could. And they could even stop issuing longer term securities, in theory.

          • In any case, I appreciate the nuance. I do think it is important, though I don’t think simplifying changes the take home message 99%+ of the time, which is what matters. Perhaps that’s not the case though.

          • Missing the forest?! Maybe it is time to re-visit my first paragraph in the very first comment above ;)

            A bonus question for you: what is the impact of demand deposits on bank pricing?

            • If you mean bank pricing of loans… deposits are another source of reserves for individual banks so the cost of acquiring deposits can have an impact on the cost of loans

              • wh10: so the cost of acquiring deposits can have an impact on the cost of loans

                remember we are talking demand deposits, right? So what costs are we talking about then?

                • I’m not following you sensei.

                  • Yes, demand deposits have a cost but this cost has nothing to do with the Fed’s interest rate policy. And demand deposits make a very big share of bank funding and the bulk of their profitability.

                    • Yeah and guess where I learned that? From Scott Fullwiler, MMT extraordinaire himself. But of course, Scott forgets about the real world completely, so what am I saying. Not to mention what I learned in my neoclassical econ courses…

          • wh10: And they could even stop issuing longer term securities, in theory

            So what?! Banks would not care less. This is something that I have read many times from MMTers and this is pretty much wrong. Firstly, the long-end of the curve is NOT necessarily defined by the cash instrument called treasury bond. Cash instrument is a part of equation but it is far away from a full equation. Secondly, the claims by MMTers that banks need a long-dated instruments to price off their products is factually wrong even in their own logic. Pension funds and insurance companies need long-dated bonds but not banks. Overall the bond holdings of banks are small. Thirdly, no single bank works off the treasury curve unless we talk about some really underdeveloped market. The benchmark curve for banks is interest rate swaps curve. And finally, banks as naturally leveraged players in the interest rate market can and will arbitrage away any pricing discrepancy between the two curves which makes to conclude that for the long-end it is the interest rate swap curve and not the treasury yield curve that is more important for banks and therefore horizontal money.

            • Aren’t you saying that arbitrage will bring the interest rate swap curve in line with the treasury yield curve…

              • Oh, and this is from Scott Fullwiler, MMT extraordinaire, word for word:

                “First, there are these things called primary dealers, who can borrow at the repo rate and fix their costs for any maturity in forwards and buy any Tsy issue that goes above the borrowing costs. And the repo rate–created out of thin air with just a previously issued security as collateral–always arbitrages with the overnight target rate.

                Second, there are these things called hedge funds–like 100s of Warren Moslers–who can (and in the case of Mosler, have and will continue to) borrow at LIBOR and fix this rate at any maturity in swaps or forwards. And LIBOR arbitrages at the overnight target rate, while eurodollars are created out of thin air like any bank loan. “

                • then you should re-visit your own statement above about what drives what. And please make sure that all MMT extraordinaireS are consistent with each other. Because this is NOT what I observe from Bill and Warren. However even from the quote above it is clear that the whole thing is NOT about those things called primary dealers. They are just prices takes. They are the first level of arbitrage between banks and non-bank financial institutions. But nothing more of substance, i.e. it tells you nothing about the logic of banks alone.

                • “Oh, and this is from Scott Fullwiler, MMT extraordinaire, word for word:”

                  So what about the arbitrage? What arbitrage?

                  There are arbitrage opportunities but the quote you quote says something different.

                  • Yeah we’ve been through this before. On technical grounds you are right. But you’re critiquing nothing with meaningful implications. Even if it is definitionally not risk-free arbitrage doesn’t mean it isn’t what drives market pricing.

              • Rather the opposite

  25. miller b says:

    Cullen Roche
    Okay, then explain how all that debt is being “destroyed” as MMT describes it. Because it’s clearly not being “destroyed”. It’s essentially rolling over in perpetuity and has been for a hundred years.
    While you’re at it, explain why MMT says the banks “leverage” govt money because that’s clearly wrong also. MMTers don’t believe the money multiplier. There’s no leveraging of anything going on there.
    While you’re doing that you might as well try to explain why MMT says the govt has a “money monopoly”. MMT says credit is money. MMT also says monopoly power is always about controlling price. But credit, which is money, is not price controlled by the govt so the whole money monopoly argument is dead wrong also. But MMT uses vague words like “leverage” or the hierarchy to create a 1:1 relationship where one doesn’t exist….Talk about obscure!!!!
    These are obscure points to most other people whether you think you understand them or not.

    I think you’re “obscuring” MMT or you misunderstand it.

    Financial assets are created when loans are created and financial assets are destroyed when loans are extinguished. Weather more financial assets gets created than destroyed (net gain in debt) in a certain period ( your chart) doesn’t prove that these mechanical aspects aren’t true. More debt is required as more debt is always owed than financial assets created to pay back debt.

    Banks must redeem their created bank deposits for base money on demand. In this way they are leveraged to base money, while even if no reserve requirements or other regulatory constraints are in place. Banks must consider the ratio in matters of solvency. Just as the period when bank notes were redeemed in gold. Bank notes were levered to gold and even if there was no legal requirements on the ratio of gold to claims on gold that doesn’t mean it is not levered to gold. Base money is the new gold.

    In regards to the money multiplier. MMT rightly claims that bank money is created first and the government in turn increases base money (reserves) to keep the system solvent . In contrast to the orthodox view that the government puts out reserves first than banks multiply or leverage on top. So Banks can lend as much as they want as long as the current governments actions are maintained, but can collapse the system by not providing reserves in turn. This does not change the fact that bank deposits are redeemable at par for base money which the government has exclusive (monopoly) over and therefor are leveraged to them.

    So to sum up bank money is redeemable at par for base money which the government has monopoly power over this is very clear in their primer.

    • Cullen Roche says:

      You prove my whole point by saying that bank money is created first. There is no “leveraging” of state money. You blatantly contradict yourself. Leverage has a very specific meaning. To describe your use of it as “leverage” (with banks creatingmloans first and finding reserves later) is 100% wrong. You can’t leverage something you don’t have. You’re trying to create a 1:1 relationship where there is none. Pure obfuscation….

      • miller B says:

        I did nothing of the sort.You are not that stupid Roche. Who creates first is irrelevant. Banks must have reserves period. This is how transactions are settled between banks by transferring reserves. Banks can create all the deposits they want internally, but must settle in reserves. who cares that banks can create internally all the claims on reserves (and do it first). To interact with the outside world they must have base money which the government has monopoly of. They are tied to reserves. Implying that reserves are irrelevant to the banking system is ” pure obfuscation”
        trying to impose your personal definition of “leverage” and pass it off as axiom is “pure obfuscation”

        Banks settle with other banks in reserves (at a 1 to 1 ratio). this ties ( or what ever word suits your fancy ) Bank created deposits to government money. It puts Government money at the hierarchy (another word you have trouble with) as banks need base money, but government doesn’t need bank created money.

        Banks do not create money only claims on base money. all forms of money are not created equal. I suppose next you’ll say money has a very specific meaning and “obfuscate” some more

        • Госбанк says:

          This is how transactions are settled between banks by transferring reserves. Banks can create all the deposits they want internally, but must settle in reserves.

          It is too simplistic a picture. Banks usually settle on a netting basis e.g. through CHIPS. If bank A owes bank B $100, and bank B owes bank A $99, they settle via CHIPS with the residue being finalized over the fedwire with central bank money.

          So, in the above example, 99% of obligations were settled with horizontal money netting.

        • Cullen Roche says:

          Don’t fall into the standard MMT trap and start calling everyone else names when they catch you making a mistake. It only makes you look bad.

          You get the whole causation wrong. And in doing so you misinterpret how the entire economy works. The state does not have a money monopoly. As you admit, the banks create credit first. The govt supplies reserves where necessary. They are a facilitator. To call this a monopoly is absurd. To call it “leverage” is equally fallacious and a blatant attempt to obscure the meaning of the word. You might as well claim the govt has a monopoly on all companies in the USA since they can only be monetized in USDs. That’s a crazy assertion. Pure obfuscation and a misrepresentation of the worst kind. The words “leverage” and “monopoly” have no place in these conversations and you and other MMTers should stop using them. It doesn’t matter that banks settle in reserves. The reserves are supplied if necessary. They facilitate the banking process. Some countries don’t even have reserve requirements! In case you haven’t figured this out yet – the banks run the system. Not the govt. The govt just greases the wheels. You are trying to make some sort of weird multiplier argument by claiming the banks leverage reserves. No, that’s wrong. Sorry.

          • It’s worth remembering that the little dip in your graph was potentially enough to destroy the entire financial sector. We were apparently on the brink of banking armageddon in 2008.

            In the UK the Chancellor received a phone call at about 3 in the morning, in which he was informed that if the govt and BoE didn’t intervene immediately then the UK banking system would go into a terminal collapse over the next couple of days. This would have dragged down the entire economy and, in turn, probably would have brought down the government.

            Maybe we would have eventually ended up with some sort of fascistic revolutionary movement rising out of the ruins to seize power, as happened in Germany. Maybe they would have executed the entire financial class in front of baying mobs, a la French Revolution. Who knows?

            Thankfully we don’t live in those sorts of societies. In our society government is in partnership with the private sector. Banks need the government’s money to pay taxes and to settle accounts. Bank credit is, at it’s base, a promise to deliver the state money on demand, and banks operate within legal structures determined by the government. In turn the government depends on a strong and prosperous private sector, and the legitimacy bestowed on it by the democratic process. The government facilitates private sector prosperity, and determines the rules by which the private sector operates.

            • Cullen Roche says:

              If you want to believe this is all run by the govt then be my guest….At least you’re no longer using the words monopoly and leverage in these descriptions….

              • I’m not sure why you find those terms so troublesome, though I take your point. Maybe what’s needed is two separate dictionaries – one for MMR and one for MMT. We can talk about the situation in different ways, conceptualize it in different ways. Debate is important – testing, questioning, argument, disagreement, evidence, counter-evidence, theory, results…

                • Cullen Roche says:

                  No, what the world has is the MMT definition of words and then the rest of us have the traditional meanings. You guys blatantly misuse terminology all over the place….

                  • You should probably take that up with Warren Mosler or Scott Fullwiler, not with me. You should put your claim (that they “blatantly misuse terminology”) directly to them. It could make for a better debate – first hand rather than second. I’m pretty certain they’ll disagree with you, but you might prove them wrong.

                    • Cullen Roche says:

                      What’s to debate? There is no leveraging of govt money. There is no money monopoly. This is easily verified unless you’re wearing policy blinders.

                • geerussell says:

                  I mostly see the semantic debate as a way to avoid the policy debate.

                  • Cullen Roche says:

                    No, you all change the meanings of words in order to push forward your policy agenda. Again, you have it exactly backwards.

            • Госбанк says:

              the UK the Chancellor received a phone call at about 3 in the morning, in which he was informed that if the govt and BoE didn’t intervene immediately then the UK banking system would go into a terminal collapse over the next couple of days.

              Perhaps, the Chancellor was as clueless as the phone caller was, or as much as the German banks that bought Abacus from GS as cooked by Paulson. Is not that a possibility ? Maybe the Chancellor’s personal investments might have been affected ?

              There is a lot of academic work indicating that the financial armageddon picture was highly exaggerated. The baker did not stop baking and the shoemaker did not cease shormaking. The latter in China of course.

              Who would care about a couple more of Lehmans or GS going down ?

              • “There is a lot of academic work indicating that the financial armageddon picture was highly exaggerated. ”

                I agree. My ‘picture’ was an exageration, leading to the almost-absurdist image of resurgent fascism and revolution. To be taken with a large pinch of salt. The basic point being that in this society public-private are interdependent, but each has different ‘specialisations’, so to speak.

  26. Госбанк
    This is how transactions are settled between banks by transferring reserves. Banks can create all the deposits they want internally, but must settle in reserves.
    It is too simplistic a picture. Banks usually settle on a netting basis e.g. through CHIPS. If bank A owes bank B $100, and bank B owes bank A $99, they settle via CHIPS with the residue being finalized over the fedwire with central bank money.
    So, in the above example, 99% of obligations were settled with horizontal money netting.

    just because most of the time counterpart transactions cancel out. doesn’t negate the fact the banks money is merely claims on reserves. A bank deposit is a promise to pay base money. How much base money is required for a specific amount of transactions of claims on base doesn’t change the fact that all bank deposits are redeemable in base.

    In fact it is the convertibility that gives bank created deposits any value at all.
    If every customer of a particular bank went to convert their bank deposit to base money at once. Only to find that the bank only has $1( base money) for every $10 in bank created deposits. What is the value of your $10 deposit( pre FDIC).

    In my poker game we buy chips( claims on cash) in place of money. If we all break even (no money changes hands)it doesn’t at mean that were weren’t playing for money. or that no one ever needs to have money. I couldn’t get away with having 10million in chips to the table without a player questioning my ability to convert the chips into cash.

    How bout everyone puts 10 million chips on the table. even though the net worth of the table is under 1 million. You right, it’s fine and appears we don’t need any more net worth to settle chip claims as long as every stays close to even. clearly 10 million dollars in chips doesn’t have 10 million dollars of worth in this game.

    so what mechanism insures all transactions are close to equal in banking?

    • Госбанк says:

      Leaving aside the rudiment of settling transactions in currency notes at the household level that persists mainly for historical reasons, the central bank money acts as mere lubricant to smooth imperfections arising from various imperfections that occur during transaction settlements. In a frictionless economy, there would be no need for central bank money. Think about it.

      This lubricant function is exactly what allows for monetary policy implementation.

      The Canadian banking system is as close as one can get to a frictionless settlement in the modern world. Compare the following two numbers: the outstanding household and commercial debt (a rough approximation for horizontal money) is about CA2.5 trillion whilst the amount of base money at depositories accounts with the Bank of Canada is about CA25 million. With the vanishingly small amount of base money and the legal requirement of having a zero reserve balance, they seem to be doing just fine. In fact, they settled about CA10B per hour or CA130B a day, as of several years ago with the puny CA25M.

      • Cullen Roche says:

        A superb comment.

      • Like a giant man standing on the shoulders of an ant.

        • Cullen Roche says:

          You keep trying to create a hierarchy of influence when the reality is that it’s all one interdependent machine. You wouldn’t say fuel has a “monopoly” on a cars ability to drive, but that’s essentially what MMTers try to say with the monopolist argument. All the obfuscation is an effort to push a policy agenda forward based on the state as monopolist…..I’m not trying to be difficult, but you’re wrong to do this.

          • Yes definitely. Especially the recent double-post on “Public Money Monopoly” which makes several explicit mistakes to argue for public monopoly such as claiming that deficit always increases the money in circulation – a statement obviously wrong. Intentional blur of words/terminology to reach a conclusion.

          • Well I did say above that “in this society public-private are interdependent, but each has different ‘specialisations’.” That’s a personal take on it.

            I don’t understand why you wouldn’t want to debate these issues – i.e. “the monopolist argument”, and “leverage”, with Mosler and Fullwiler.

            • Cullen Roche says:

              I already know their positions. I know all the MMT positions. They’ll argue that state has a monopoly supply of net financial assets and then we’ll agree that the govt has to supply the NFA’s and then they’ll say the best way to do that is through a JG and I’ll disagree and prove them wrong using their own evidence and they’ll still claim I am wrong. There, we just had the debate and it was pointless.

          • geerussell says:

            You can’t wish away the fact that there is a hierarchy of authority within the machine with the state at the apex of it. Reality always wins.

            • Cullen Roche says:

              Yes, the reality is that the government doesn’t have a “money monopoly”. We’ve been over this. You can try to obscure this point by claiming that the govt has a monopoly on parts of the money supply, but you can’t say they have a “money monopoly”. You also can’t claim the banks “leverage” govt money because they don’t. As you rightly say, reality always wins. And the reality is that the terms “money monopoly” and “leverage” have no part in these discussions unless you’re trying to twist reality to push forward a policy agenda like the job guarantee (which is precisely what MMTers do). Reality just won this debate. Thanks for participating.

              • geerussell says:

                the terms “money monopoly” and “leverage” have no part in these discussions unless you’re trying to twist reality to push forward a policy agenda like the job guarantee (which is precisely what MMTers do).

                That’s not a fact-based argument. That’s a deflection hoping to avoid one. It’s no less frivolous than the (insert unfounded claim about your politics) shots people were taking at you.

                • Cullen Roche says:

                  Is there a “money monopoly”? No. Do banks “leverage” govt money? No. Are these arguments central in MMT research that attempts to argue in favor of the job guarantee and other policy proposals? Yes. So do the math.

                  • geerussell says:

                    Is there a “money monopoly”? As described in MMT, yes. Now if you ignore the entirety of “as described” and instead fill in unrelated issues and JG objections, then sure… things are obscured and the answer is no.

                    • Cullen Roche says:

                      Ah yes. I made it all up, right? Except I didn’t. The term “money monopoly” is all over the literature and used to imply that the govt has a monopoly on money. I could pull up all sorts of documents if you’d like. But it doesn’t matter because the argument is simple in MMT terms. They say the govt is the monopoly supplier of net financial assets. They then use this argument to claim that as the NFA monopolist that they should set prices. Okay, that’s a stretch since money is not a govt monopoly, but whatever. So they then go on to use the NFA monopolist argument to claim that the govt is the only entity that can create full employment. Okay, that makes sense. And this is where things get messy. MMR and MMT both agree that govt should issue enough NFA’s to maintain a healthy and stable economy. But when you say that the govt should just issue the NFA’s then MMTers say “but don’t be surprised when inflation flares up with 2-3% unemployment without a JG!” But then you look at JG commentary and find more misleading comments like the JG being a “price anchor”. No, it’s a price buoy. And MMTers generally agree it will create at least a “one off” inflation. Okay, fine, let’s just agree to disagree on the inflation front even though a little common sense can prove that paying 20 million people $16/hr will increase prices….So then we’re back to issuing NFAs. And then the MMTers say that the JG will increase output. But then we go to the Fullwiler simulation and find that pump priming beats the JG as stimulus. Okay, back to square one. Then the MMTers say the JG will be a better “buffer stock”. But then we look at the Fullwiler simulation and find that’s wrong also. Back to square one.

                      So what it all really comes down to is whether you think the govt should eliminate unemployment on moral grounds since it doesn’t contribute to our inflation discussion, doesn’t boost growth and doesn’t serve as a more liquid buffer stock. And that’s just a political position. So, like I’ve repeatedly said, you all are framing a moral argument as an economic argument and abusing the monopolist argument to do so. Now, if you want FE just based on moral and political grounds then say it. That’s fine. But don’t obscure the way the system works because of it. So just say it – you are taking a moral stand. There’s nothing wrong with that. Just don’t try to pawn it off as something it’s not because that’s intellectually dishonest.

              • Cullen, if it’s helpful, Fullwiler wrote this in response to the Lavoie critique of MMT, specifically addressing the use of the word “leverage”:

                “Regarding leverage, it’s always been a mystery to me how the horizontalists have been so against this terminology. We are using “leverage” the exact same way that it is used in accounting and financial management—indeed, it’s the same way that all the corporate finance textbooks I use teach it. That is, leverage to NC refers to a leveraging of the balance sheet, as in assets divided by equity—the “equity multiplier” or “leverage” (my students have to learn that this measure is called “leverage” since that’s what the business simulation we use calls it, for instance). In other words, “leverage” here has nothing at all to do with leveraging reserves as in the money multiplier, and it has nothing at all to do with suggesting that reserves or anything else are a priori necessary for leverage to occur. To bring this together with vertical money or NFA, the point of “leverage” as NC uses it is to describe leveraging of NFA, again as an expansion of debt leverages existing equity (in fact that’s exactly what we mean, since NFA are equity for the non-govt sector). Note that some folks commenting on the blogs that are highly skilled with accounting have from the start been completely on board with NC on NFA, vertical money, and leverage [in terms of how] NC defines and uses these terms.”

                • wh10,

                  I don’t think it’s a good reply because they indeed use the word in tons of places.

                  “Everything is then pyramided on the state’s IOUs—we can think of that as a
                  leveraging of HPM”

                  http://www.levyinstitute.org/pubs/wp_647.pdf

                  • Yeah I can’t speak to the specific uses. I haven’t followed closely enough and don’t get hung up over these things, though where there are mistakes, I think they should be corrected. I must say though, I do think there is merit to Fullwiler’s point that no one will be perfect and there will be mistakes here and there out of 100s and 1000s of papers, particularly in unpublished pieces. Not that it is an excuse, but it happens. I am sure you all have and Keynes ma; he hasn’t recently admitted these mistakes. I understand the crusade here is to paint MMT as purposely (or not purposely?) obfuscating reality to push their leftist policy agenda, so it’s not just 1 off instances in your all’s mind, but a broader flavor. I don’t subscribe to that belief, but that’s fine; maybe my mind will change. In the meantime, I will still come here for the interesting and useful perspectives.

                    • Meant to say “has recently admitted those mistakes.” I will say though, I will take Fullwiler at his word, that that is their *intention.* I’d also be interested in seeing the counts of how many times the mistake has been made, in blogs/WPs vs published papers. I do think though they will be more cognizant of it, especially after Fullwiler has admitted there has been some lose wording. But if you want to believe they are purposely being subversive, that is your prerogative.

                    • And I don’t know what you mean by it’s “not a good reply.” Maybe you can be more specific about what you actually mean, since that is the name of the game here. I told Cullen that it might a helpful quote since it is relevant to the discussion and clears up the MMTers’ *ostensible* intention. It’s also helpful to hear from MMTers directly in these debates (well, some of them). It’s your choice to believe whether or not Scott’s full of BS.

                    • That’s not the point. The usage is regular and I have read enough of their papers to make this claim. It is true nobody is perfect but this has been pointed out even before and this is not the first time. Secondly, if there is a genuine point – especially given it has been pointed out earlier – one shouldn’t really come back and claim and the usage is the standard usage. My reading of Fullwiler’s reply is that he is stating that the MMTers usage is standard so there was no need to have raised the issue. (i.e., the may also use it as per standard terminology but that they also use it in the non-standard way such as leveraging HPM).

                    • Look buddy, I already affirmed all that. My initial post was not intended to say your or Cullen’s beliefs were objectively wrong. I simply posted his response with the comment that it may be helpful, because I think it’s helpful to understand their intention. It’s your prerogative, but it’s frankly annoying when you twist my words as ammo for your crusade.

                    • Apologies for having rubbed the wrong way. My comment was to point out that I believe it wasn’t a good defense (by Scott and not you of course) and I believe that Cullen’s claim still holds.

                    • Truce and cheers. I’m fine with that.

                    • Cheers.

                      Here is a background – since you raised some points anyway wh10.

                      I have seen this over 3 years and initially there was a tendency to take a few things without complaining. However it has so happened for some commenters including me, some things are met with hostility . So you may see myself as extra-complaining but there’s a specific reason to that. You wouldn’t have seen me doing that initially in that period if you chance to see my earlier comments. But over the years and broadening my readings and comparing it with other approaches on and off blogs, literature such as PKE etc., I have come to a specific opinion. And this is not unique to me among the commenters and I have many opinions common with Cullen/MMR. In the specific case at hand, if you read Lavoie’s critique, he also says that this leveraging thing is used in many instances across literature and blogs and also quotes his earlier critique from years ago.

                      The specific opinion I have in mind is roughly about positive economics versus normative economics. Sometimes it is difficult to notice and it took me a while to notice this and this was after some commenters such as JKH pointed it out – who obviously – given the range and depth of JKH’s knowledge/experience/exposure – was quick to realize this. (of course don’t take it my attitude and behaviour as the same as JKH’s or MMR or other individuals or groups. There may be similarities but careful about other things. I know you wouldn’t – this is for others reading!)

                      One of the blogs – Econrevival – who got mentioned in Lavoie’s critique had an “a-ha” after reading his critique and mentions this: positive versus normative. Maybe the blogger doesn’t “get it right” generally speaking, but he was quick to figure it this out! Actually more than reading Lavoie’s specific article, I see some of the things more clearly from Cullen/MMR!

                    • Thanks Ramanan. Helpful to know and understand. Obviously, it’s hard for me to just consign myself to simply believing your assertion that you have read enough to levy these claims as substantive and fair. I admittedly don’t have your breadth of experience and knowledge and am several years behind in terms of the time I have spent with this material. That being said, I am still going to make sure I think for myself, taking into account the various different perspectives I come across, as my knowledge evolves.

                    • Wh10,

                      Yes of course, I can’t so easily substantiate online plus difficult to keep record hence a few things I said were opinions. Hence I quoted Lavoie specifically about instances on leveraging and even found one more. Of course there are more.

                      Conclusions take time so one should carefully assess everything. More generally, all I was trying to ask is to keep this distinction in mind about what actually is and how it ought to be when reading MMT.

                      For example there is no meaning to the statement that the government neither has nor has no money. Literally it untrue because the government has cash balances in bank accounts and foreign exchange reserves. It is intended to convey the message that the government can in principle run with no financial assets or any money-like asset in one definition or another or without issuing bonds. Should that be taken to mean that the government need not have foreign reserves? Unclear. But that is normative economics, even if it may be right or partly right as a proposal.

                      More importantly there is a mixup between positive and normative and this is where problems arise. I guess in this specific instance “positive” and “normative” are not the best words but it is more about “as is” and “how it should be”. The above example may appear minor to you (not me) but there are many instances where one sees this.

                      One instance of this is if you see Stephanie Kelton in her journal version of “Do Taxes and Bonds Finance …” says explicitly that the view that taxes are respent is an erroneous view and the purpose of her paper is to get this straight. Of course I know well what she is “trying” to say :-) but it not an erroneous view.

                      This positive versus normative may sound silly because MMT does come out much better than say Austrian economics. But according to the latter group, they are right. So everyone has to go through some test.

                      Okay time for me to stop. But the reason I wrote the above is that in recent 2-3 weeks or so you pointed out about my constant criticism in 2-3 places and i didn’t get a chance to reply properly so this is one. I was merely pointing out the “what is” and “what ought to be” distinction which IMO is highly important as was pointed out by commenters. In the above example, this is straightforward to see
                      in more complicated discussions, this is even more troublesome given that there is an informality in the language.

                      So maybe I will point this out over time but next time you hear Mosler talking about shredding notes by the tax collector, do remember me :-) [He has changed "notes" to "old notes"].

                      So its less about the volume of material than keeping this in mind.

                • geerussell says:

                  That’s clears it up quite a bit.

  27. paulie46 says:
  28. paulie46 says:

    Ramanan March 18, 2012 at 4:04 pm
    Yes definitely. Especially the recent double-post on “Public Money Monopoly” which makes several explicit mistakes to argue for public monopoly such as claiming that deficit always increases the money in circulation – a statement obviously wrong. Intentional blur of words/terminology to reach a conclusion.

    Deficit spending increases net financial assets (as Treasuries) and adds an equal amount of new spending into the economy.

    So simple a caveman could understand it.

    I’m pretty sure everyone that understands the monetary system knows this.

    • Net financial assets is not equal to money in circulation as claimed in the posts I referred to.

      • paulie46 says:

        Ramanan March 18, 2012 at 5:13 pm
        Net financial assets is not equal to money in circulation as claimed in the posts I referred to.

        Deficit spending increases spending in the non-government by swapping savings for spending.

        Deficit spending CAN increase the money supply in terms of the quantity of dollars if the government buys Treasuries instead of the public, which appears to have been done to the tune of about $5 Trillion so far.

        Again, I think you are taking things out of context to make the argument that others don’t know what they are talking about when in fact they do.

        The fact that sometimes people mis-speak (equivalent to a typo) does not mean they are being deceptive. Seems like you tend to assume the worst motives for others.

        It is common for some to hold others to a higher standard than one holds him/herself.

        • Well sometimes is different than always.

          “The basic idea is that the government augments and diminishes the amount of money in circulation during some period of time whenever the monetary payments it makes to the non-governmental sectors of the economy exceed its monetary receipts from the non-governmental sectors of the economy. ”

          This is a careless statement. Of course, that was pointed to the writer and some such as Scott Fullwiler are very careful in their accounting. He even had a blog post on how the money supply changes as a result of issuing of bonds where he was quite precise.

          “Again, I think you are taking things out of context to make the argument that others don’t know what they are talking about when in fact they do.”

          Maybe. The quoted statement is not a proof of that.

          Look, like in all sciences, one has to be careful in writing. The whole subject of economics is in trouble because economists struggle with simple accounting concepts. It doesn’t help making a case by incorrect accounting claims when the whole point is to prove that it helps being precise in accounting.

          • Sorry should be specific. The first quote is taken from http://neweconomicperspectives.org/2012/03/the-public-money-monopoly-pt-i.html

          • paulie46 says:

            Are you ignoring the fact that Treasuries are considered “money good” and in many applications stand in quite well for “money”?

            Further, your argument doesn’t seem to lead anywhere other than people say things on the internet that aren’t always perfectly clear.

            You are welcome to be hyper-anal, but you aren’t really helping the overall understanding of the subject by being so.

            Most of us are interested in th exchange of ideas, not semantic excercises.

            The confusion you accuse Fulwiller, Wray and Mitchell of creating has not been confusing in the least to the likes of me or most of the commenters I’ve run across at various blogs.

            • “Are you ignoring the fact that Treasuries are considered “money good” and in many applications stand in quite well for “money”?”

              The standard statistics do not count it as money. It is true that there is a logic to broadening and consider wealth as more appropriate rather than the narrow focus on monetary aggregates of which I am very well aware of.

              Doesn’t affect my comment @Ramanan March 18, 2012 at 4:04 pm

  29. I don’t think Mosler or Fullwiler have actually used the term “money monopoly”, so you might be in some sort of agreement over that one. The term seems instead to be something from Dan Kervick and Randall Wray.

    I’m not sure how this particular question of terminology is actually all that important to the JG issue. Whether one talks of “money as a public monopoly” or the govt as “a sovereign issuer of its currency”, or an “autonomous currency issuer”, the question of how to achieve max employment without undue inflation ultimately remains the same in both cases. Saying that there is no “money monopoly” doesn’t somehow change the basic problem.

    I personally don’t mind whether you choose to dispense with the terms “leverage” or “money monopoly” and instead use something else you consider to be more accurate. I don’t use “money monopoly” myself. That’s not to say I necessarily agree with your line of argument, only that I don’t think your use of alternative terms would really alter the basic nature of the problems MMT addresses. Your argument at present seems to boil down to: “there is no ‘money monopoly’ therefore MMT is wrong and there is no rationale for the JG”. That’s not really argument, more a form of specious rhetoric.

    • Cullen Roche says:

      Specious rhetoric? You don’t seem very familiar with this discussion then. The whole JG argument is based on the state as price setter, as monopolist. Maybe you should do some more research into it because if you don’t believe there’s a money monopoly then you will likely see the argument in favor of a JG as much weaker than you currently believe.

  30. geerussell says:

    Cullen Roche
    And this is where things get messy. MMR and MMT both agree that govt should issue enough NFA’s to maintain a healthy and stable economy. But when you say that the govt should just issue the NFA’s then MMTers say “but don’t be surprised when inflation flares up with 2-3% unemployment without a JG!”

    The missing element here is that if all you’re doing is issuing NFAs you will encounter inflation while still having unemployment. So you back off the NFAs to maintain price stability… and are left with UE. So what then of the residual UE? Too bad, grist for the mill? If only there were a non inflationary way to address that. Oh wait… that’s the entire point of the JG.

    You say the JG doesn’t create inflation as though it’s a drawback when in fact it’s the key feature. Fiscal policy that fights inflation creates unemployment. A JG fills that gap.

    And then the MMTers say that the JG will optimize output. But then we go to the Fullwiler simulation and find that pump priming beats the JG as stimulus. Okay, back to square one. Then the MMTers say the JG will be a better “buffer stock”. But then we look at the Fullwiler simulation and find that’s wrong also. Back to square one.

    You want to evaluate JG in a vacuum and then say if it doesn’t, by itself, solve every economic difficulty then you’ve debunked it. That’s the wrong measure.

    The baseline for success is swapping the buffer of unemployed for a buffer of employed without causing any net harm. There’s a lot of JG literature which claims the net benefits go beyond this but at a minimum that’s enough.

    So what it all really comes down to is whether you think the govt should eliminate unemployment on moral grounds

    I think there’s a mandate for the government to conduct economic policy towards the goals of price stability and full employment. That’s not exactly fringe thinking.

    since it doesn’t contribute to our inflation discussion, doesn’t boost growth and doesn’t serve as a more liquid buffer stock.

    What are you pointing at to support the assertion that in terms of finding private sector employment a pool of unemployed is more liquid (employable) than a pool of currently employed?

    And that’s just a political position.

    To the extent that any policy involves politics, yes. Being against a given policy is no more or less political than being for it.

    • Cullen Roche says:

      Looks like you misconstrued my entire comment. I didn’t say the JG would cause no inflation. I said it wasn’t a price anchor just like I’ve been saying for months on end….I also said that even MMTers say it will cause at least a “one off” inflation so I don’t really know what your point is. You seem to be falling for the “price anchor” myth. No, it’s a price buoy. Wages and prices can still float up because the JG doesn’t control the wage spectrum. It only controls the very lowest wages which don’t even drive spending in this country. You think Goldman Sachs will change their pay scale because the govt sets a minimum wage? Uh, wake up and take your political blinders off. It’s just absurd to think the JG is some sort of price stabilizing tool. Absurd. Some of this is just common sense.

      I didn’t evaluate the JG in a simulation. Fullwiler did. His results showed that it’s not a liquid buffer stock and that its growth benefits are meager when compared to pump priming. That’s not my data. It’s his and I know for a fact that he’s said the JG doesn’t pack the punch some MMTers think it does….

      You’re just repeating your political talking points. Nothing new here. So admit it. You want the JG for moral purposes. That’s fine. But just say it. You probably want universal healthcare and social security also. Hell, I do too. It’s a moral position. I would never sell it as an economic position though as MMT tries to do….

      • Of course it’s a moral position. Are you just discovering this Cullen? The MMTers are taking a political stand on unemployment. Did you ever believe it was anything different?

      • geerussell says:

        One-off inflation is kind of a contradiction in terms. Yes, there’s a one-off adjustment when a JG is introduced and other wages find their spot relative to the new floor. What it doesn’t cause is sustained upward pressure on prices, as inflation is more commonly described.

        Wages and prices can still float up under a JG exactly as they do now with a buffer stock of unemployed. As stated previously, the point of the JG is to mop up residual unemployment, not to be a panacea against inflation or wage increases. It is sufficient that a JG does not itself cause those things.

        I looked at the same simulation you did. I didn’t see where the JG was described as less liquid. In fact, such a notion flies directly in the face of current experience comparing the job prospects of a person with a job than one without. The employed are more employable.

        As for the stimulative effect of a JG vs pump priming, the two aren’t mutually exclusive, they are complimentary. The JG begins where pump-priming ends, at the inflation barrier.

        Is there a moral component to not abandoning millions of americans to unemployment? Sure, that’s not exactly a scandalous admission. It also makes economic sense.

        So admit it. You are either arguing in favor of policies that maintain unemployment or ones that end it. Which are you doing? If you are defending the status quo, it’s an argument in favor of unemployment. If you are arguing pump-priming alone, you’re still in the status quo NAIRU wheelhouse just with a more politically palatable level of unemployment. If it’s some other policy as yet unrevealed, let’s hear it.

        • Cullen Roche says:

          So you admit the JG doesn’t do much on inflation. Okay. Good to know.

          According to the Fullwiler simulation of the GFC the JG would cost ~$324B over this period while the stimulus cost ~$600B. The stimulus adds 3.13MM jobs while the JG adds just 1.73MM jobs. So while the JG gets slightly better bang for your buck the difference is negligible. Liquid buffer stock? Nope.

          I didn’t frame MMR in a way that it takes moral stands. Personally, I am in favor of full employment and world peace and all that good stuff, but my moral decisions are peripheral to MMR and nothing more than my personal opinions. It’s not my duty to tell you how to achieve those things. MMT is the theory which has mixed in all sorts of policy into the theory. So don’t turn this back on me and try to claim I am being immoral and anything close because I’m not the one who positioned an economic theory around a political agenda. You guys did that so the onus is on you to prove that your ideas are driven by fact and not just ideology. I am not convinced.

          • geerussell says:

            Yes, not just admit that point on inflation but proclaim it. A JG isn’t how you fight inflation, it’s how you clean up the wreckage created by inflation fighting.

            The liquidity of a buffer stock, like other types of liquidity, is how readily you can move it. Is there any disagreement that private sector employers have a strong bias towards hiring people who are currently employed or only very short term unemployed? That’s what liquidity means in terms of a JG.

            • Cullen Roche says:

              We’re perfectly good at fighting the deflation that results from the boom/bust cycle. We haven’t had a major sustained deflation in 80 years. The JG doesn’t help this. We don’t need a JG to fight off deflation. We already have countercyclical policy in place that achieves this. I don’t see what the JG adds that we don’t already have. And what it doesn’t help is stop the boom….So what’s the advantage? Why sell it as “full employment AND price stability” when it’s really only one?

              As for the liquidity buffer stock – yeah, your intuition is accurate, but the Fullwiler simulation doesn’t confirm this. The data shows that the JG doesn’t achieve anything that a stimulus and unemployed buffer does…..

              So what do we have left? MMT taking a moral stand. Which is fine. But why not say that is your primary reason? Why sell it as a superior economic approach?

              • It’s dead on arrival if they try to sell it as a moral position. So they try to sell it as economics.

              • geerussell says:

                And what it doesn’t help is stop the boom….

                Let’s just retire this once and for all. Using it as a criticism of the JG misunderstands the role of the buffer stock. Think of it in terms of the current arrangement. What stops the boom is whatever set of fiscal and monetary measures that are deployed to contract the economy and drive people out of private sector jobs. That’s what it means to stop a boom, yes?

                The buffer stock is where they land when driven out of private sector employment. Changing the buffer stock so that the landing pad is a JG job instead of unemployment only changes the composition of the buffer stock. The whole dynamic of what caused the boom in the first place and the measures deployed to fight it are unaffected.

                Why sell it as “full employment AND price stability” when it’s really only one?

                Because it’s the only proposal for full employment suggested so far that is compatible with price stability at the same time. Otherwise, FE gets sacrificed to maintain PS.

                The data shows that the JG doesn’t achieve anything that a stimulus and unemployed buffer doesn’t…

                According to the presentation you’re referencing, the JG has only a bit less impact than stimulus for about 1/2 the cost and less than 1/2 the budgetary effect. More importantly, the two aren’t mutually exclusive. The JG has never been sold as a standalone answer to everything. It’s part of a larger framework.

                • Cullen Roche says:

                  Yes, we’ve covered the buffer stock in detail. No need to keep repeating the semantic points about it.

                  On FE – you guys have gone and changed the definition of FE just like you do with so many words. FE in your world is no involuntary UE. But to the rest of the field of economics it’s a situation in which all available labor resources are being used in the most economically efficient way. So yeah, we achieve YOUR definition of FE and PS with the JG. But there’s zero proof that the JG provides the most efficient use of available resources. But here we go again just up and changing the definition of words to fit a political agenda….

                  The data on the JG simulation is there for everyone to see. The stimulus cost 600B and the JG cost 324 according to Fullwiler. The stimulus added 3.13MM jobs and the JG added 1.73MM. So you’ve paid 187K per job vs 191K in the stimulus. That’s a 2% difference. In a simulation like that that’s a negligible difference. So it’s not a more liquid buffer stock despite your claims.

                  So we’re back to square one. The JG is a moral/political position and not much else.

  31. “you guys have gone and changed the definition of FE just like you do with so many words”

    The current mainstream meaning of FE was introduced by Milton Friedman, who stated that FE corresponds with the NAIRU, at best. MMTers argue his use of the term is incorrect and misleading, and serves to paper-over a policy of controlling broad inflation through unemployment. The MMT view is that everything currently achieved through NAIRU could be achieved more efficiently through what Mitchell calls a NAIBER policy (JG) – which would also have the benefit of reducing hysteresis and other costs associated with unemployment.

  32. *this is my simplified understanding