Few things are more important than understanding precisely how the US government is able to eliminate solvency crisis through its institutional arrangements. One of the key Monetary Realism contributions is understanding these relationships and how they create the autonomous currency issuer. Banks are essentially harnessed as agents of the government in the funding process as they are required to bid at Treasury auctions. So the notion of not being able to procure funding is nonsensical. But even in a worst case scenario (let’s say a hyperinflation where the banks resort to self preservation mode and boycott auctions) the Fed can always step in as the lender of last resort. For more on this please see the Monetary Realism primer.
Although few people have gone into the intricate detail that JKH has on this topic, this understanding is not unique to Monetary Realists as noted in a recent Paul Krugman piece here (via Manifesto for Economic Sense):
“The confidence argument. Their first argument is that government deficits will raise interest rates and thus prevent recovery. By contrast, they argue, austerity will increase confidence and thus encourage recovery.
But there is no evidence at all in favour of this argument. First, despite exceptionally high deficits, interest rates today are unprecedentedly low in all major countries where there is a normally functioning central bank. This is true even in Japan where the government debt now exceeds 200% of annual GDP; and past downgrades by the rating agencies here have had no effect on Japanese interest rates. Interest rates are only high in some Euro countries, because the ECB is not allowed to act as lender of last resort to the government. Elsewhere the central bank can always, if needed, fund the deficit, leaving the bond market unaffected.”
That’s the contingent institutional approach whether he knows it or not. The next step is realizing that, because there is no solvency constraint for an autonomous currency issuer, that the true constraint is inflation rather than solvency. The policy responses are obviously very different (particularly in the current balance sheet recession) when you recognize this fact.
If you have yet to read JKH’s Contingent Institutional Approach please see here. It’s a must read.
I don’t know, there is still a lack of clarity in what he says, but he is definitely in the right spirit.
I am getting nit picky here (that after all is the essence of the contingent institutional approach), but under the contingent institutional approach, the CB CANNOT “always, if needed, fund the deficit,” if what he is referring to is some unusual scenario in which the Fed *directly* funds the deficit, by either providing overdrafts to the Treasury or buying in the primary market. And it sounds like he is referring to that type of scenario because he uses the words “if needed” and “fund.” But that is an alternate world with a different institutional structure; it’s the MMT general case. Rather, the key to properly understanding this from an operational perspective is that the Fed is effectively *always* indirectly “funding” the deficit by maintaining control of interest rates in the secondary market (as Marinner Eccles puts it). (And “funding” is really not such a great term, because it is really a matter of interest rates, rather than securing the right quantity of funds.) Under the contingent institutional approach, it’s just a matter of the *degree* to which the Fed needs to intervene in secondary markets; this is the same as Fullwiler’s semi-strong and weak cases. But the Fed is always doing this; it’s not a matter of “if needed.” I suppose one scenario of “if needed” would be if the Fed needs to announce a specific price for tsys in the secondary market, but Krugman doesn’t give me the feel this is what he is talking about (maybe I should give him the benefit of the doubt).
I am being nit picky, but I actually think it is important. Because until you have crystal clear clarity, there will remain doubt as to what is possible and what the risks are to fiscal policy.
I agree wh10. Your clarification helps me understand the situation much better than Krugman…
At the risk of starting another pointless MMT mud slinging war, I would only point out that WH10 does not fully understand the CIA or else he wouldn’t have said this:
So the entire point of JKH’s clarity on this issue is to avoid making mistakes like WH10 by saying that the Fed always funds Tsy or that the term funding is wrong. Now I am nitpicking, but the whole purpose of the post (and JKH’s) is to understand these points….
Well see my comment below.
“So the entire point of JKH’s clarity on this issue is to avoid making mistakes like WH10 by saying that the Fed always funds Tsy”
Whoa whoa whoa. I never said that. First of all, this was all an attempt to rationalize what Krugman was saying. I said the Fed manages interest rates (not every interest rate), which creates conditions for the Tsy to fund its deficit at reasonable interest rates. “Always” applies to the Fed managing interest rates, and I attached the label of “indirect funding” to this; it’s the same point Marinner Eccles makes. And I only did that by trying to rationalize Krugman’s words, since he used the word “always,” but never specified we were in a world in which Congress legislated a “contingent approach.”
“or that the term funding is wrong. Now I am nitpicking, but the whole purpose of the post (and JKH’s) is to understand these points….”
I never used the word “wrong.” It’s without a doubt that the Tsy needs to fund its deficit. I was referring to the use of the word with respect to what the Fed is doing in today’s reality, rather than what the Tsy needs to do (which absolutely is to fund its deficit). It’s more accurate in my mind to say that in today’s reality the Fed is creating interest rate conditions conducive to the Tsy being able to fund its deficit, rather than saying the Fed funds the Tsy. In JKH’s contingent approach, only then does the Fed fund the Tsy.
Okay, thanks for clarifying. The bigger point is, let’s applaud PK, rather than tear him down over minor details. He’s got a mega megaphone. What’s the purpose behind attacking every little detail here even if it is wrong (which I don’t think it is)? He’s very clearly moving the ball in the right direction so rather than whip out the sniper rifle and deflate his ball let’s try to play support if it’s deserving (and I believe this position very clearly is deserving). Some post-Keynseian groups have this tendency to bite the heads off of even those who are their closest allies and they alienate themselves in doing so. What’s the point?
I’d prefer that MRists not take the vitriolic approach….
Feel free to erase these comments haha.. It got off to a bad start because I didn’t have the definitions right for JKH’s paper. I didn’t intend to bite Krugman’s head off. I was commenting in the spirit of JKH’s very rigorous paper, trying to be rigorous myself, since this is one of the few places where we can nerd-out like that.
Exactly – sometimes nerds just needs to be extra nerdy. This is a good place for it.
Well, I now realize my comment is embarrassingly garbled, because I had in mind JKH’s entire paper, rather than the specific contingent institutional changes, which could make it such that the Fed could directly fund The treasury. But my point still stands that Krugman was unclear about this in the way he wrote it, since he is mixing the reality we have today with a contingent institutional set-up; but also that I am being annoyingly nit picky and Krugman has the gist.
I actually think PK gets it perfectly fine in his post. He uses the term “if needed” as in “contingent”. It’s time to start giving credit where credit is due. PK is obviously moving the ball in the right direction. We should applaud him for that. Not tear him down for what looks like minor details to some post-keynesian groups.
1. I think the “always” funding idea is incorrect (and so does JKH). It’s an extreme position to take.
2. The term “funding” is quite accurate since the Tsy does have to procure the funds as a currency user.
1. “Always” in the sense that the Fed is “always” managing interest rates (which indirectly creates conditions that allows the Tsy to fund its deficit)
2. I don’t take issue with the point you make, but I do take issue with what is implied by the Fed funding the Tsy “if needed.” What does this mean? Under JKH’s approach, the Fed cannot directly fund the Tsy. The only way this could be interpreted as correct is if it is referring to the Fed’s actions in the secondary market, but in that case, the Fed is always doing that in some way or another.
1. I wouldn’t even say the Fed is “always” managing interest rates. The fact that long rates move at all based on market expectations is a clear indication that “always” is wrong. If the Fed set the long bond at 1% for instance, then we’d be living in that alternate reality. They don’t do that.
2. I don’t think you’ve fully digested JKH’s points. http://monetaryrealism.com/treasury-and-the-central-bank-a-contingent-institutional-approach/
Ok, I didn’t say “every” interest rate, nor did I mean that.
2. Ok – I don’t think I had the definitions right. The contingent approach refers to changing the operational constraints from what we have today. But even in that case, it is misleading to say the Fed can “always” fund the deficit in the sense of overdrafts or primary mkt purchases. This requires Congressional action.
That’s why it’s “contingent”. JKH describes the reality of it all and some “contingencies”.
It’s good to remember the fed can manage long term rates when ever it wants, and also that it has in the past.
During WWII, the fed set interest rates across the entire curve. And we had 26% YoY growth for a quarter.
The Fed always manages short term interest rates…
The modern Fed “always” funds the Treasury because it has precommitted itself to conducting open market operations in treasury bills and bonds, as well as agency debt. This creates an in-built liquidity premium in the prices of these instruments which perpetually reduces the funding costs of the Treasury and its various agencies. If it was permissible for the Fed to conduct open market operations in a broad array of private and public securities then this liquidity premium would be diluted across a broader spectrum of assets, reducing what has become for the Treasury a permanent liquidity and therefore funding advantage. For example, the Fed used to conduct open market operations in both government securities and bankers acceptances, and therefore the liquidity advantage it provided to markets would have been equally shared amongst the private and public sector. It is now entirely paid to the public sector.
I thought Krugman was starting to come around, but some of his latest peices have set him back IMO. His description of the housing bubble is highly unhelpful:
” first, we had a period of too much optimism about debt, in which debtors borrowed and spent too much; since one person’s debt is another’s asset, creditors had to be induced to spend less via high real interest rates. Then people remembered the dangers of debt, and we moved from leveraging to deleveraging.”
People didn’t “remember the dangers of debt”, the assets that supported the debt started collapsing in value and the Fed started raising rates so ARMs were resetting at rates people couldn’t pay.
He continues:
“…And that’s the role of fiscal policy: its goal is not to stop aggregate deleveraging — the public sector doesn’t have to run up debt as quickly as the private sector runs it down — but to slow it down to a pace that can be accommodated by monetary policy.”
So he views fiscal policy as simply a supplement to monetary policy, meaning he wants the recovery to result primarily as a result of private sector credit creation. He is actually close to a monetarist position here. They just want to perpetuate the debt driven boom bust cycle. He also overstates the possible impacts of monetary policy in a BS recession. Many households have had their balance sheets and credit situations impaired so deeply that they either cannot or will not borrow at any interest rate.
Baby steps. Let’s get him on board with the idea that the govt isn’t “running out of money”. That’s the big one in my opinion. If there’s one thing we should really be promoting it is this institutional approach and the understandings that are derived from it. We can describe exactly how the system works and prove that there is no solvency constraint, but rather an inflation constraint. That’s a game changer.
That’s a big point, but I don’t think Krugman is close to coming around on that one. An article he wrote in 2003 was making the rounds in past couple weeks. He was saying how due to Bush’s roughly 3% of GDP deficit he was switching to a fixed rate mortgage because rates were about to start rising rapidly. As usual, at the time the fiscal deficit wasn’t even high enough to offset the trade deficit, not to mention the residual slack in the economy from the 2001 recession. In interviews even today he says he’ll become a fiscal hawk when the economy recovers. He learned from Japan’s experience how a deleveraging economy works, but still doesn’t get how the NFA drain results in no choice for the private sector but to grow via unsustainable increases in leverage. I’m hopeful as you are that he comes around, but at this point I don’t see it.
He’s hugely far away from where he needs to be. He’s a bond vigilante.
He’s part of the reason I started the posts on the “No Ponzi” assumption buried in the Intertemporal Government Budget Constraint.
The no Ponzi assumption allows every possible future. It allows people to say “you never know, we might violate the no ponzi and then we’re doomed” at all times.
You’ll find Paul K is part of this thinking. He does not realize how flawed this little assumption is. It’s ok, it’s a bit of an obscure and even cheater argument as to why this assumption cannot be a valid assumption to make. But it crushes the ITGBC as surely as the terminator was crushed in the industrial vise at the end of T1.
The assumption isn’t knowable with the knowledge we have today. Therefore, we are forced to cower in fear of possible futures at all times.
Here is why the no Ponzi is wrong:
“If I am understanding you correctly, you’re saying that the IGBC is an ex post condition and as such worrying about it ex ante should be done only insofar as there is an observable that tells us whether we’re violating it or not. If there isn’t one, then who cares, more or less. If there is one – such as inflation rate – then this is the only thing we should be concerned about, which bring us back to your posts about solvency vs. inflation”
It’s also not economics, at least according to Nick Rowe:
http://traderscrucible.com/?s=concise
Yes, agreed. If you found a Monetarist who was in favor of counter-cyclical fiscal policy you would basically end up with PK. He lets his ideology blind him at times too, when speaks out of both sides of his mouth, demanding higher taxes on the rich while calling for looser fiscal policy at the same time. Bit of a contradiction there.
I don’t think higher taxes on the wealthy and looser fiscal policy are necessarily contradictory. If we raised taxes on wealthier people, and did nothing else, then it’s contradictory. But if taxes are raised by “X” amount on wealthier people, and lowered MORE THAN “X” amount on less welthier people, then the two notions are not contradictory.
Right. The trend in response to progressive taxation of income has been to shift the tax burden to income from work by privileging capital gains, providing tax advantages designed for use by the upper two quintiles, and reducing inheritance taxes.
The push for this is based on the supply-side argument that such as policy is needed to incentivize investment in order to ensure continuing innovation, which is the based for increases in productivity. The demand-side argument is that effective demand is determinative rather than supply and Say’s law is inapplicable. Saving doesn’t drive investment, investment drives saving, and investment is demand-driven.
The systems issue is that money flows upward. Deficit spending flows to saving of the net financial assets created, and saving increases with increase in revenue from all sources after taxes. The systems approach is to maintain the circular flow by redirecting excessive saving (hoarding) of some to the effective demand of others. Since savings (assets) are not taxed federally, the alternative is to tax the flow of saving of saving that is economically inefficient, in particular that which involves extraction of economic rent.
I agree, but Krugman almost never presents it this way. It’s usually presented in the context of deficit reduction, and that higher taxes needs to be a part of that “solution”. Of course almost all in the modern monetary school would argue that the deficit is much too small now and even in the long run will probably be too small. Therefore there is no reason to raise taxes on anyone. Now I agree that the tax code could be restructed to be more progressive (ie. eliminate tax expenditures that are mostly regressive, reduce/eliminate regresssive payroll taxes etc.) but to just propose tax hikes on the rich in isolation is a politically motivated, not economically motivated policy.
Well, he’s totally a creature of his environment. He’s a good guy, and gets the counter cyclical argument. He apparently understands JHK’s Contingent Institutional Approach too. (btw I love the flexibility of this approach – note it gives a framework to approach the euro problems)
But start by using the Natural Rate of Interest and the no Ponzi assumption, and you end up as a monetarist bond vigilante. You can’t avoid it.
I don’t understand why anyone would think he’s part of the problem. He’s done more than anyone on the planet – literally anyone – to make liberal arguments mainstream. He’s the only non-idiot liberal in the mainstream media.
Being slightly wrong about economics (and for extremely acceptable reasons) isn’t a crime. It’s not like many people in the world even know about these flaws.
There may be more to it than meets the eye. Mainstream economics is a club, and like every club it has membership rules.
There’s a reason that heterodox economics is called heterodox. Heterodox economists are excluded from the club by the membership rules.
I suspect that many mainstream economists know a lot more than they on, because no one wants to be marginalized or maybe even kicked out of the club for breaking the rules.
Krugman is probably pushing the envelope out as quickly as he thinks he can without being marginalized. He is in a unique position to do so with the cover of a Nobel and a NYT bully pulpit. John Carney is in a similar situation at CNBC. They seem to be moving slowly to us, but to others it probably seems like light speed.
Krugman is doing theology while for the most part he is unaware of that fact.
“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.
Science advances one funeral at a time.” (Max Karl Ernst Ludwig Planck)
wh10,
I guess you didn’t like Krugman’s usage of always. His usage of always was “when needed, always in those times” something like that and not always always (i.e., even when not needed)
Right Ramaman, but even “when needed,” we cannot “always” adopt the contingent approach, because that requires Congressional action, which is not guaranteed!
Re:Krugman’s example. Is it is really about a contingent or not, approach?
It seems to be more a matter of whether the government leads or follows the private sector. If the private sector does not want to spend (wants to save), but the government wants to maintain the status quo, then the gov must spend (disave) (sectoral balance). That is one thing I agree with the market monetarists, interest rates don’t tell you anything about the stance of monetary policy unless you know which sector is the driver.
So we’re supposed to start interpreting Krugman in the same way we read tea leaves regarding the Fed?
Or would it make more sense to award the Nobel Prize to those who really deserve it — Wray, Mitchell, and Mosler? The MMT founders have certainly had a bigger impact on Cullen and the MMR crowd than has Krugman…
Let’s not get crazy here. After all, it’s not about influencing me. It’s about influencing the world. The message of the MMT founders hasn’t resonated with the world because their “general case” is just not correct. I don’t think Nobel is in the business of awarding prizes for getting the operational realities of the monetary system wrong.
You can interpret Krugman however you please. But I’d prefer if you not use this forum to spread your dislike for his every word. I don’t see how that’s productive and you guys have plenty of other websites to spread that message.
“But even in that case, it is misleading to say the Fed can “always” fund the deficit in the sense of overdrafts or primary mkt purchases. This requires Congressional action.”
Not really, if the President declares a National Emergency, the International Emergency Economic Powers Act all sorts of superpowers. Its under Title 50 War and National Defense, so he has to relate it to a foreign power or citizen— hmm, I wonder if any foreign citizens own T-bonds? That will do it.
“regulate, direct and compel, nullify, void, prevent or prohibit, any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States”
)
http://www.law.cornell.edu/uscode/text/50/1702
He could order the Fed to buy T-bonds directly and permit Tsy overdrafts, or to respect the sincere wishes of the blockheads who desire an “independent central bank”, simply order the Primary Dealers to buy T-bonds. He can also step into any market to block trades or unwind them. Again, this would require at least one (1) non-US citizen investor in said market.
Okay good and interesting to know, but the President deciding to do that is hardly guaranteed as well. His lawyers may disagree with you, as well as his political strategists. Obama’s lawyers don’t seem so keen on some of the other legal tactics suggested to address the debt ceiling debate, like the 14th amendment argument.
Also, there is a “must” component too, right? According to that pesky 14th…they can’t question the debt of the U.S.
Beowulf – off topic but one thing I have been meaning to ask you is have you encountered any conflict between the way we do law when it comes to Govt spending/taxing and the way MMR or MMT understands macroeconomics? I’m not exactly sure what I am trying to get at, but I imagine the way lawyers or the court might deal with macroeconomic issues is more along the lines of how neoclassicals think of it, rather than post-Keynesians. Maybe not though.
I think Krugman’s implicit point, which I believe is correct, is that the Fed can fund the deficit not just in the minimal sense of keeping the private sector interest rates low and converting a portion of Treasury debt to the private sector into zero-interest debt to the Fed (which still leaves the principal of the debt intact), but also by buying up as much government debt as it wants and rolling it over automatically, so that Treasury could continually pay off existing debt with new debt, indefinitely into the future. Even under existing institutional arrangements, the Treasury liability for the principle on its debt to the Fed would never require additional public revenues if the Fed were always willing to roll over that debt by buying new debt.
Under current institutional arrangements, the Fed can only buy this debt through the intermediation of the private sector dealers. But that only becomes a stumbling block if the Fed allows it to become one. In the past, Krugman used to express the worry that Treasury could lose access to the bond market, that the bond vigilantes might strike, etc. But Treasury cannot lose access to the bond market, even under existing institutional arrangements, so long as the Fed lets it be known that it is ready to buy up government debt at a price that is profitable to the purchaser of that debt. If the Fed sends this clear signal, then Treasury can charge whatever it wants for its debt, and someone will always be willing to buy it. Treasury yields can only rise if the Fed permits them to rise.
The only snag in all this, under existing institutional arrangements, is the debt ceiling. The Fed and the Treasury might be perfectly willing to play this game forever, but the sum of the rolled over debt will continue to grow in the presence of deficits and eventually hit the debt ceiling, if one exists. That intra-governmental debt owed to the currency issuing part of the government is economically insignificant. But its existence is a tool of Congressional control.
Whether the Fed is willing to play the game, given its current operational independence, depends on how it sees the debt affecting its price stability targets. Whenever a dealer buys some government debt and then the Fed buys the debt at a price that is higher than what the dealer paid for it, it has injected money into the private system. Under some circumstances closer to full employment and with higher inflation, it could slow down its purchases, let yields rise, and decline to convert as much of the debt.
Seems Marinner Eccles thought so:
There was a feeling that this [Fed overdrafts to the Treasury's General Account] left the door wide open to the Government to borrow directly from the Federal Reserve bank all that was necessary to finance the Government deficit, and that took off any restraint toward getting a balanced budget. Of course, in my opinion, that really had no relationship to budgetary deficits, for the reason that it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed.
Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.
http://fraser.stlouisfed.org/docs/historical/house/1947hr_directpurchgov.pdf
“The only snag in all this, under existing institutional arrangements, is the debt ceiling. ”
The snag is also the burden placed upon the Fed by history and custom. The Marriner Eccles quote – while interesting (I’ve posted it to my blog, too) – comes before the 1951 Fed Treasury accord, which effectively put an end to the Fed practice of pegging the full range of gov bond rates (ie setting rates below market and offering a price profitable to its purchaser, as it did during the war). Under the current institutional paradigm, in place since 1951, the Fed is restricted by custom from pegging bonds rates and allowing infinite government financing. You can argue that custom must be changed, but then you are advocating a change to the existing way things are done rather than trying to describe how things currently work.
You know more of the history than I, but wasn’t it more the issue that the Fed didn’t *want to be told what to do* rather than specifically limiting their future options? So the new custom is the Fed can do what it thinks is best, rather than specifically no pegging? There could conceivably come a time when the Fed decides pegging makes sense.
And of course, currently, the Fed doesn’t peg longer term rates. But what Eccles is talking about isn’t just pegging. He’s talking about Fed interest rate and liquidity management more generally, which can enable significant deficit spending without interest rate spikes even without the need to peg rates. Of course, you could reach a point where pegging might become necessary to prevent spikes, but to a large extent, he is describing the “existing way things are done.”
Ironically, it was Eccles who was replaced for not wanting to continue pegging!
Well, in the document that is quoted Eccles is defending a very specific power that the Fed once had – the ability of the Fed to lend directly to the Treasury. This was withdrawn in 1981 or so, long after Eccles died. He equates the effects of this power to the effects of the Fed’s setting of rates during wartime, and I think that’s a fair comparison. Direct lending surely limited the rate spikes your are talking about, as did pegs. But with the direct lending rule gone since 1981 and fixed rates last seen in 1951 , I don’t think Eccles is describing a modern day Fed. I’m sure that the primary dealer system does allow for some sort of limited buffer, but you must agree that this tool is a far more blunt one than it used to have when it set long rates or lent directly.
Agree the comparison is apt. As Fullwiler says, the difference is minimal if the govt ultimately gets the same financing rate. As for the rest, I am admittedly unfamiliar with the entire cited document, but I was referring to this specific part: “the fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank…” With the exception of pegging, I would argue that’s essentially what happens today, but the Fed limits its focus to managing the FFR, which has kept the dog on the leash, as Cullen says. (Although the Fed recently has dabbled and influenced longer maturities via QE, but not with the same potency as pegging.) In any case, we’re quibbling over minor details and semantics. I seem to be good at that in this thread. I should refrain.
If you were running the government and you had to raise $1 trillion by tomorrow, would you rather have a Fed that fixed the entire spectrum of bond rates by buying in the open market, a Fed that offered to directly lend you that amount, or a modern auction system with primary dealers and a Fed that sets the overnight rate? Or would you be indifferent?
Not sure what you’re getting at. That’s a very large amount on a very short notice. In that case, I’m not sure if the markets could handle it. You’d probably want to peg or go direct to the Fed. However, it may be possible that if you gave sufficient advanced notice to markets they’d secure appropriate financing. I don’t know these things well enough.
But that is a very unusual situation. In most reasonably sized auctions, the last option works fine, which falls into the category of the the “Reserve System indirectly [financing] the Treasury through the money market” by virtue of the fact that it is managing the overnight rate and general bank liquidity.
Just curious. I would have said something along those lines. I’m still not entirely sure how much slack the primary dealer system offers. Something I’ll have to read more about.
I don’t understand: how is it possible that (almost) nobody understands even the basic functionality of the system? We’re talking open (?) info about the functionality of the FED and Tsy. Even an economist like PK? Each time I read the discusssion here or on other economics blogs, I’m baffled. It’s like hearing nuclear physicists responsible for maintaining a nuclear installation discuss and wonder how it would work. Scary.
If people/economists don’t even understand how it works, how are they supposed to know what to propose in advice to politicians?
Another great presentation by Steve Keene for those who do not follow his work on Steve Keene’s Debt Watch website.
Scroll down to :
Canada’s Debt Bubble
http://www.debtdeflation.com/blogs/
In the enlightening debate between Brett Fiebiger from the MMR side and Fullwiler, Kelton & Wray on the MMT side (“MMT: A Debate”, Workingpaper Series #279, P.E.R.I.), there is something that I fail to understand. Fiebiger repeatedly calls to task Wray for claiming both that policymakers “might require that the treasury have money in the bank (deposits at the central bank) before it can cut a check” and that “fiscal receipts do not finance the subsequent expenditures.”
It is clear from Wray’s use of terms that the first refers to a strictly legal requirement, one that does indeed shape reality (which makes it a descriptive statement), while the latter describes financial truth (a normative statement). To put it another way, it would be perfectly legitimate for someone to claim that a government bond is redeemable by the Treasury. That would be both a descriptive and normative statement. But suppose Congress (“the policymakers”) passes a law that obliges bondholders to present to the Treasury’s cashier not just their bond but also one Greek Yogurt Special. One would be correct to argue that, although from the perspective of Finance, a bond is redeemable by the US Treasury, the reality is that you need to visit Ben & Jerry’s first.
I do not understand why it would be “Orwellian doublespeak” to have each statement stated in its own perspective.
Any thoughts, please?
The actual operational arrangement is that Treasury has a deposit account with the central bank. It has no overdraft privileges for that account. Therefore, it must cover all expenditures from that account with cash inflows to it. Such inflows are fiscal receipts. Therefore fiscal receipts finance expenditures.
That is the “financial truth” of actual operational arrangements.
If you want to change bond redemption rules to include a Ben and Jerry’s kicker for Treasury staff, then consider putting it into law, which if passed would change existing operational arrangements. That would be a concrete proposal with some teeth (or tongue) to it.
Alternatively, one could choose to bathe in the mist of Orwellian doublespeak, which is no consequence to understanding how monetary operations actually work, and of no consequence in terms of constructing actual proposals for changing monetary operations.
“Isn’t it the case, however, with the U.S. Treasury that, in case its account with the central bank empties out, it can immediately replenish it with (to cut a long story short) “printed” money?”
No.
The general question is – under what circumstances is the central bank able to credit the Treasury’s deposit account with funds paid into it by the central bank itself.
Under existing arrangements, the central bank can only do so when it buys Treasury bonds newly issued directly by Treasury – which the central bank can only do to the extent of maturing bonds that it happens to hold in the its own portfolio. And even in that case, there’s no net credit to Treasury’s account, because maturing bonds require a debit for the same amount as the credit.
Beowulf (Carlos) of this blog has introduced the platinum coin idea as a possible proposal. That would allow the central bank to credit the Treasury account directly for a large denomination platinum coin purchase. But that’s the kind of concrete proposal I alluded to, which would change actual operating arrangements from what is generally the case now.
Apart from that, central bank money “printing” is done either in exchange for assets purchased from the market (e.g. reserves for bonds) or for liabilities exchanged (e.g. notes for reserves). Those things do not affect the Treasury account with the central bank.