The Fed and Treasury’s “Symbiotic Relationship”

It’s certainly not the most destructive myth in the USA (this is), but definitely one of the more pervasive ones – this idea that the Fed is entirely independent of the US government.  But a new paper from the NY Fed sheds light on what they call a “symbiotic relationship”.  A close look at the management of government funds during the financial crisis shows that this debate about independence is largely semantics.  Operationally, the Fed is very much an agent of the government or as I often like to say – the other pocket in the same pair of pants as the US Treasury.  But don’t take it from me.  Take it from the Fed officials themselves:

“The U.S. Treasury and the Federal Reserve System have long enjoyed a close relationship, each helping the other to carry out certain statutory responsibilities. This relationship proved benefi cial during the 2008-09 fi nancial crisis, when the Treasury altered its cash management practices to facilitate the Fed’s dramatic expansion of credit to banks, primary dealers, and foreign central banks.

…Understanding the relationship between Federal Reserve credit policy and Treasury cash management is important because the relationship illuminates an important but sometimes unappreciated interface between the Treasury and the Fed. It also underscores the symbiotic relationship between the two institutions, in which each assists the other in fulfilling its statutory responsibilities.”

MMR views the world in a similar light.  As an agent of the US government the Fed is essentially a partner in helping the US government achieves its objectives.  In this regard it is very much a part of the US government.  There’s no point denying it.  Even the Fed knows this relationship is symbiotic and they’re explicit about it….

Comments

  1. Robert Rice says:

    Good words Cullen.

    One might point out that the Fed has a *.gov* website. Amazing how that is if it isn’t part of the government. And let me add to your quote another from the Fed:

    “The Federal Reserve System is considered to be an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive branch of government. The System is, however, subject to oversight by the U.S. Congress. The Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government; therefore, the description of the System as ‘independent within the government’ is more accurate.”

    http://www.federalreserve.gov/pf/pdf/pf_1.pdf#page=4

    See pages 2 and 3.

    Add to this myth the other myths of the Fed being a for profit entity pillaging the masses (it isn’t; while it makes profits on interest income, etc., after using a small amount to pay their expenses they hand all profits over to the Treasury; the Fed has turned over about 95% of their income since their inception) as well as the myth that the Fed isn’t audited (it is, every year), and we might dispel of the paranoid hysteria in some circles surrounding the Fed.

    Myth 2 refuted:

    “The income of the Federal Reserve System is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other major sources of income are the interest on foreign currency investments held by the System; interest on loans to depository institutions; and fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations.

    After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95 percent of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914. (Income and expenses of the Federal Reserve Banks from 1914 to the present are included in the Annual Report of the Board of Governors.) In 2003, the Federal Reserve paid approximately $22 billion to the Treasury.”

    http://www.federalreserve.gov/pf/pdf/pf_1.pdf#page=4

    See page 11.

    Myth 3 refuted:

    http://www.federalreserve.gov/faqs/about_12784.htm

    Three myths down in one single bound.

    • Cullen Roche says:

      Nice Robert! Thanks.

    • Sure Robert. That’s what they WANT you to think!

      (I’m joking of course. Except conspiracy theorists, like mainstream economists, will always find a “way out” when proven wrong. )

      • Robert Rice says:

        You are right, sadly worldviews are far too often held as unfalsifiable. It is a form of intellectual dishonesty. A spirit of cooperation in sifting for true propositions through argument evaluation would behoove us all. The goal is simply to know the truth so we can support policy in the public interest.

  2. I would add a couple of things

    1) 7 of the 12 FOMC members are appointed by the Executive branch (The Board of Governors).
    2) The 5 other members are the presidents of the federal reserve branch banks – who are all approved by the BoG.
    3) The Fed is MANDATED to turn over all profits to the Treasury. Either we live in an authoritarian state where a “private corporation” is required to turn over all profits to the Government or maybe its jsut the fact that the Fed IS the government.
    4) Private Corporations can’t really acquire .Gov domains.

    -I will say this though. The Fed is slightly influenced by the private-sector since the Board of Directors (The Class A,B,C) at each branch pick the branch president.
    -The Fed is “politically Independent”. Meaning, they cannot be forced to do policy they do not believe is right (IE Keep rates really low to create a boom economy, thus a bubble or be forced to not “print” to save the Dollars “value”)

    ^ If you guys have think I’m wrong on this issue, I’d like to hear your thoughts. That’s one part of the Fed I always get confused about (the private influence -not control- over a public institution)

    • I think the fed is also very closely joined with the private sector. I think the point is more to show how “non-independent” the fed is from the treasury, not to say that it’s not extremely accomodative and “symbiotic” with the private sector as well. I think it’s fair to say that the fed will NEVER let the treasury fail and will do everything in its power to NEVER let the entire banking system fail. It’s probably equally as accomodative to both.

      However, “independence” is the wrong word to describe the circle-jerk between the fed, treasury and banks, to be sure. It’s a trifecta of interdependence IMO.

      • By “private sector,” I mean the banking sector, which I wouldn’t even really consider part of the private sector in a very pure way. It’s kind of like saying military contractors are part of the private sector. However, when the rules are set right, banks can be very good at allocating capital for wealth creation, because somebody either gets rich or gets poor because of it (not just gets rich or gets gone :))…. so there’s obviously a good aspect of the private sector there…. but ONLY when the rules are set right.

        • I agree – the fed is the ultimate representation of our govt. We give money to banks for free and setup a huge institution to be able to do this, while making people beg for scraps.

          Monetary Policy is really a series of smoke screens designed to obscure the fact we like to give money to banks.

    • Robert Rice says:

      The Fed is meant to be influenced by various sectors of the economy. In other words, it’s purposeful so that the interests of the populace are served:

      “Each Reserve Bank has its own board of nine directors chosen from outside the Bank as provided by law. The boards of the Reserve Banks are intended to represent a cross-section of banking, commercial, agricultural, industrial, and public interests within the Federal Reserve District.”

      http://www.federalreserve.gov/pf/pdf/pf_1.pdf#page=4

      See page 10.

  3. Robert Rice
    After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95 percent of the Reserve Banks’ net earnings have been paid into the Treasury […]

    Note that when the Treasury pays interest on the part of the National Debt held by the Fed it gets 95% of it back. Over time I expect more and more of the debt to be held by the Fed. If the public becomes aware that they don’t really pay interest on the debt held by the Fed then people will want the Fed to monetize all of the debt. So hyperinflation is almost assured. (Do you think maybe Vince is obsessed with hyperinflation?)

    • Vince,

      What do you think about the tally stick system, which involved no issuance of debt? What about any system that is simply a spend-money-into-existence operation, purely, without the polka the fed/treasury currently do?

      The tally stick system did not result in hyperinflation, but had zero debt backing it. You seem to be implying that a base monetary system that doesn’t include the “slowing effect” of interest payments on savings-oriented securities is doomed from the start. I tend to think we should completely abandon this system of issuing debt to spend and later managing it with the fed. I think we should spend money as is dictate by congress, and issue bonds only to serve as 1) a risk-free savings device for households and other savers, and 2) if there is some benefit in using bonds to slow velocity and lending.

      • In at least one tally stick system the King borrowed too much money and then when interest rates went up he repudiated the debt.

        http://pair.offshore.ai/38yearcycle/#1671

        I think that if the Treasury just printed and spent money, without any central bank, that you would get the inflation as soon as you had the deficit. However, the dynamics of building up a debt equal to the GNP and then quickly converting it all into liquid cash could not happen. So while you might get high inflation it seems hyperinflation might be less of a risk really.

        • Doesn’ the taxation of the money (or, more importantly, the expectation of future taxation) give people a reason to hold the money, and give the money value? I mean if money itself doesn’t have value, what on earth gives a bond denominated in that money value?

    • Robert Rice says:

      Not obsessed, just concerned. You are mistaken though.

      Error 1:

      If the Fed is the debtee, how are they going to monetize the debt? The Treasury is the debtor; this means the Treasury owes. Hence the Treasury would be the entity monetizing debt.

      As an alternative the Fed could cancel the debt.

      Error 2:

      If the Fed held every last penny of government debt and the Treasury mints to pay it all off, this will have absolutely no effect on demand since none of this money will make it into the economy. The minted money goes from one government agency (the Treasury) to another (the Fed), never entering the domestic sector. As a matter of fact, all the money borrowed by the Treasury will have already made it into the economy.

      • Are you sure no effect on demand??

        I tend to agree, mostly… but if we completely removed interest-bearing risk-free paper from the world economy, wouldn’t that have an effect on velocity as people look elsewhere, though admittedly small, because rates are already so low?

        • Robert Rice says:

          I don’t mean to suggest the Fed buying up every last penny of debt won’t influence demand, only that the Treasury minting to pay off this debt the Fed purchased won’t have any additional effect.

      • I fully agree that we should think of the Fed as part of the government. I really find it hard to think of it in any other way. I really can’t even understand what difference it makes which part of the government we say made the new money that paid off the debt. Why should I care if the new money is made by “The Fed” or “The Treasury”? What difference if they are really both part of the government?

        If Bill Gates owns $50 billion in treasuries and he sells them to the Fed, he can then go out and buy some new toys. So I think of government bonds as a way of delaying demand for the duration of the bond. But when the bond is paid back, or bought by the Fed, the demand is released.

        Oh, I see a follow on comment that you mean after the Fed has the bonds if the Treasury were to print money and pay them off it does not matter. This I agree. Once it is inside the government it is inside. It hardly make any difference if the Treasury pretends to pay the interest and the Fed gives it back or the Treasury just minted giant coins and paid off what the Fed held.

        • Vince,

          I think THIS is where your visualization is off, and this was a clarifying point for me a while back… people SAVE first, and buy bonds second. Bonds simply reflect one person’s will to save and another’s will to invest (or a gov’t’s will to accomodate saving with a bit of interest). They don’t save for interest, they save for some level of future consumption. If bill gates had a bunch of 3-month treasury bonds, and for some reason couldn’t figure out a way to turn them into money (our system is built so they’re uber liquid, but I’m trying to see this from your angle), I’m sure somebody with a sprawling estate on the coast of Alaska would take those treasuries as payment. They’re both financial assets.

          In fact, the term “financial asset” really helped me change the way I look at all this stuff. Real assets, such as homes, businesses, even patented ideas (bending the word “real” for a second) are the productive building blocks of our economy. Financial assets are the lubrication to allow them to function. Financial assets are used as money all the time. When Entreprenerurs LLC is bought by Globocorp, it’s often done by issuing shares of Globocorp to the owners of Entrepreneurs, LLC. Financial assets exist on our balance sheets, whether traditional “money” or bonds/stocks. We operate heavily not based on whether we call one thing “money” vs “bonds,” but what makes up our balance sheets in general. If you swap cash for bonds, you still have the same amount of assets on your b/s, and the purchasing power of that balance sheet is what drives our decisions.

          This is why people say “you could QE all the debt and not have inflation,”… not necessarily because we’re trying to define bonds as money as the fact that bonds and money are both financial assets on our balance sheets, and it does us little good to try to make a big deal about the difference between one and the other.

  4. Its also independent of the Constitution. I’m dubious its anamolous status will survive the decade. The Fed will still be around, but working for the President.
    http://volokh.com/posts/1207512634.shtml
    http://volokh.com/2011/07/01/a-thought-provoking-look-at-independent-agencies/

  5. Dan M.
    Doesn’ the taxation of the money (or, more importantly, the expectation of future taxation) give people a reason to hold the money, and give the money value? I mean if money itself doesn’t have value, what on earth gives a bond denominated in that money value?

    Sure, taxation gives money value. But if the government is spending $2 for every $1 it gets in taxes the value tends to go down. If it is spending $1 for every $1 it gets in taxes it holds value. In the last few years we are close to spending twice what is collected in taxes.

    • Yes, but you have to adjust for the current account deficit, and if you do that, we had less and less base money from 1997 through 2008 in our country every year. Only recently have we attempted to go back the other way. Reserve currency issuers simply have to run larger deficits to serve this function and meet the needs of their domestic economy as well as the needs of those demanding their currency. So we can look at the currently huge deficits, yes, but we also have to not only look at our current account deficit today, but the fact that we had one for over a decade in excess of our fiscal deficits before the crisis, severely undercutting our supply of NFA’s.

  6. Dan M.
    I mean if money itself doesn’t have value, what on earth gives a bond denominated in that money value?

    It is much worse for bonds. Even if the money has value today, if it looks like it will not have value in 10 years then a 10 year bond becomes worthless today. So if we get 3 months of 6% inflation our dollars are only down about 18% but a 10 year bond will be down like 99+%.

    • Exactly… I understand this… but what you’re saying as that without part of the money supply existing as gov’t savings instruments called bonds, that base money will enter the economy and quickly translate to inflation. You seem to think that bonds are what keep us from spending, and not that the will to save comes first, and the gov’t obliges with savings instruments.

      Imagine someone saving in gold in the 1800’s.. If one wanted to save risk-free (or as risk-free as possible) once beyond a certain point, they’d have to hire secured storage of that gold. Gov’t securities weren’t risk free.. and to be honest neither is secured storage, but it’s as secure as you could get. So people actually lost real value (assuming gold having a consistent real value) to save risk-free because of storage & protection costs. People then didn’t save because bonds existed… they saved because they wanted to have something to spend in the future. It’s quite unnatural for things not to decay in value, even gold, considering storage costs. So if the REAL products of the economy tend to deteriorate at a rate of way faster than 1-3% per year, then it’s perfectly natural for people who wish to save to accept a 1-3% decrease in the value of their savings without rejecting it for canned tuna (which is probably bad after 10 years and takes up space). There has to be something for people to reject their currency for… but if we look at most things, they deteriorate in value faster than 3%, so holding dollars appears attractive because people wish to save as a natural goal to consume in the future.

  7. Dan M.
    Vince,
    I think THIS is where your visualization is off, and this was a clarifying point for me a while back… people SAVE first, and buy bonds second. Bonds simply reflect one person’s will to save and another’s will to invest (or a gov’t’s will to accomodate saving with a bit of interest). They don’t save for interest, they save for some level of future consumption. […]
    This is why people say “you could QE all the debt and not have inflation,”… not necessarily because we’re trying to define bonds as money as the fact that bonds and money are both financial assets on our balance sheets, and it does us little good to try to make a big deal about the difference between one and the other.

    This is a point where I disagree with MMT/MMR. I think bonds are a way the government can delay demand. It is the same as if they collected a tax and then later gave out a stimulus check. If they just printed money and spent it you would get inflation but by taking money out of private hands and spending that they don’t get inflation till they pay off the bonds.

    People could put cash in a safe deposit box if they did not care about interest. I don’t agree that interest does not matter.

    There are many times where governments have monetized large portions of their debt. If you could find a single one where they had a large debt, say over 50% of GNP, and monetized a good portion of that, say 1/4, and did not get inflation within 5 years you would have some evidence to support your theory. But there are over 100 cases where monetizing debt later resulted in inflation. So even if you find one I think we would have to look close to see if there was something funny. Theory has to match reality, and your theory does not on this point.

  8. Dan M.
    Exactly… I understand this… […]

    Ok. The average fiat currency last less than 50 years. When a fiat currency dies the paper is worthless. So there is about a 2% chance of your paper money becoming worthless each year. If you buy a 10 year bond you have on the order of a 20% chance that it becomes worthless. In particular at this point in history. If on top of this chance that it becomes worthless you also lose 2% each year because inflation is 2% higher than the interest rate, or another 20% loss for the 10 years, your expected value is only about 60% of what you started with. This is a fools investment. Far better off to buy some gold.

    • I’m curious, did most currencies fail along with the entire gov’t that issued it? What percent about?

      Do you think our entire gov’t will collapse?

  9. Dan M.
    Yes, but you have to adjust for the current account deficit, and if you do that, we had less and less base money from 1997 through 2008 in our country every year. Only recently have we attempted to go back the other way.

    This is a very interesting point. It would help explain how they can run deficits and not get inflation this period of “great moderation”.

  10. Dan M.
    It’s quite unnatural for things not to decay in value, even gold, considering storage costs. So if the REAL products of the economy tend to deteriorate at a rate of way faster than 1-3% per year, then it’s perfectly natural for people who wish to save to accept a 1-3% decrease in the value of their savings without rejecting it for canned tuna (which is probably bad after 10 years and takes up space). There has to be something for people to reject their currency for… but if we look at most things, they deteriorate in value faster than 3%, so holding dollars appears attractive because people wish to save as a natural goal to consume in the future.

    A common economists saying is “savings equals investment”. Investments are not supposed to deteriorate at 3% per year. This is not perfectly natural.

    If you just hold gold in a hole in your back yard you don’t lose. Note that gold was $35/oz in 1970 and is now $1,661/oz. If you are losing 3% per year you should just switch to gold.

    I have a wife and 4 sons. We can eat 100 cans of tuna in less than 2 years without even trying. When hyperinflation hits the cost of food is goes up far faster than the paychecks or interest in bank accounts. People become poor in real terms. Few people will have money left over after buying a few months worth of food. Saving in the bank is not even interesting during hyperinflation.

    • Vince,

      Sorry but even most investment decays in value. Even a factory, a very long-lived investment, will look utterly tattered after a decade. A home? Even less time. Canned tuna probably goes bad after 10 years… completely so. There’s a decay to almost everything. Gold may have the advantage of one of the few things that doesn’t really deteriorate, but it’s almost completely useless outside of money (except for SOME demand for it as a conductor at its current price), and is terribly volatile to boot, so holding it as too much of one’s portfolio could be terribly risky. It lost about 70% of its nominal value from 1981-2000, not to mention its real value (yikes, that has to be pretty bad).

      The gold buried in your back yard, at least over long periods of time, will likely hold up to inflation, but you can only safely hold so much gold like that. Otherwise you’re forced to pay a storage fee, much like a negative real interest rate would mimic.

  11. Dan M.
    Vince,
    Sorry but even most investment decays in value. Even a factory, a very long-lived investment, will look utterly tattered after a decade. […]
    The gold buried in your back yard, at least over long periods of time, will likely hold up to inflation, but you can only safely hold so much gold like that. Otherwise you’re forced to pay a storage fee, much like a negative real interest rate would mimic.

    If you bought a factory that was not producing anything of value and turning a profit but just standing there decaying it was not a good investment.

    If you are earning -3%, after adjusting for inflation, on your investments then I doubt you can buy so much gold that you can not safely store it in a single safe deposit box at a bank for a very small fee.

    • Gold is $1,660/oz. So if you have 40 lbs of it at 16 oz/lbs then you have 40*16*1660 = $1,062,400.

      I don’t know but maybe your bank charges $50/year. So as a percentage this is: $50/1062400 = .0000470632 = 0.0047%. This is much better than the -3% you have been getting.

      • This is 40*16 coins, or 640. If you put them in stacks of 10 you just need 8 by 8 of these stacks. This is easy to fit in any safe deposit box. Gold is denser than lead.

      • Storing gold is more expensive that that, usually. I can’t remember the rates off the top of my head, but $50 is not right.

        “Yeah, Ill store that $1m of gold for you – give me $50 and we’re all good.”

  12. If one of the more pervasive myths is the idea that the Fed is entirely independent of the US government, then another myth is that the Fed is not independent at all.

    The dichotomy of independent/not independent is an unfortunate way to approach what could be a very interesting subject, but it keeps popping up (especially on the blogosphere) because people find it easier to think in terms of dichotomies. When you take a sports-team approach to economics, my side is right and yours is wrong, you’ve already lost because you’re going to be suffering right off the bat from confirmation bias.

    The proper way to approach the question is from a comparative central banking approach. Which central banks are more independent and which are less? Secondly, given an individual central bank, has it become more or less integrated with the executive branch with the passage of time? The former approach requires a broad understanding of multiple central bank policies and legal frameworks. The latter requires an intensive knowledge of one central bank’s history, legal and procedural. All of which seems to be sorely lacking in these debates.

  13. Dan M.
    I’m curious, did most currencies fail along with the entire gov’t that issued it? What percent about?
    Do you think our entire gov’t will collapse?

    I don’t know the percentage of time the government also failed. My guess would be like 1/3rd.

    I think the 50 states will be survive but I think the Federal government will be greatly reduced or gone after hyperinflation. Sort of like how the USSR just went away.

    • If 1/3 of all hyperinflations were correlated with collapsing governments, one might wonder if the very cause of the failure of a currency is the utter failure of the gov’t in the first place. It goes to reason that ANY gov’t’s currency will fail if the gov’t itself collapses. It seems to me much more likely that other non-currency factors probably enter into most gov’ts failing. Things that the most powerful, free, productive, and prosperous country in the world is unlikely to see real soon.

      Further, I’ll point out that even non-fiat currencies fail… every currency linked to gold became worthless at some point. It’s much smarter, nowadays, IMO, for individuals to own gold than it is gov’ts and make promises. Gold may never fail to have some purchasing power just like a reliable gun may never fail to shoot… but that doesn’t mean it’s a good idea to build a government around the idea that as long as individuals can own gold & guns that we don’t need a common fiat currency and a military force of some basic size.

  14. Matt Franko says:

    From the Chaiman:

    “So this is our topic today is origins and missions of the Federal Reserve. So let’s talk in general about what a central bank is. If you’ve had some background in economics you know that a central bank is not a regular bank, it’s a government agency, and it stands at the center of the monetary and financial system of a country.”

    http://www.federalreserve.gov/mediacenter/files/chairman-bernanke-lecture1-20120320.pdf

    Resp,

  15. Michael Sankowski
    Perhaps there is hope for you yet.

    Of course if you guys agree that sending $500 billion a year overseas provides a deflationary effect, then you have to agree if $3,000 billion were to come back from overseas suddenly that it would be inflationary. I mean, fair is fair, right?

    • Robert Rice says:

      If by some wave of the magic wand such a trade surplus occurred here in the U.S., then certainly this would raise demand, and insofar as excess demand results, inflation will heat up.

      Please note the government can raise taxes and interest rates to respond to any excess, which will cool the economy back down.

      It’s all about trying to find the right temperature with your porridge Vincent; heat needs to be added at times to maintain the proper temperature, and ice can be added when temps are overshot. The system is never in equilibrium as it is inherently unstable. We have to be able to respond and adapt to changes.

  16. Michael Sankowski
    Storing gold is more expensive that that, usually. I can’t remember the rates off the top of my head, but $50 is not right.
    “Yeah, Ill store that $1m of gold for you – give me $50 and we’re all good.”

    Perhaps it is $100/year. Depends on your bank. I have used safe deposit boxes at 3 different banks and they always made it easy for me to put stuff in and take stuff out without them ever knowing what it was. I think this is normal. This means that they don’t really know if I just have a couple old bricks or $1 mil worth of gold in the box. It also means that if the bank is robbed I am not insured. So maybe most people with $1 mil in gold (not me by the way) take is someplace where it is insured and that costs more. But you could put it in a safe deposit box.

    • Cullen Roche says:

      Vince, we all get your argument. Is there really any need to keep repeating it over and over and over again? Maybe just come back in a few months and check in with us on the hyperinflation bet??

  17. Robert Rice
    Please note the government can raise taxes and interest rates to respond to any excess, which will cool the economy back down.

    For the vast majority of the time I agree that the government can raise taxes or cut spending to reduce inflationary pressure. However, if money were to come back from oversees in huge amounts or if huge amounts of bond holders did not want to roll over their bonds, the amounts are far beyond the government’s ability to compensate by changes in taxes or spending. This is a key insight that MMT/MMR folks don’t seem to get yet. If there is $7 trillion in bonds that come due in the next 12 months and for some reason people stopped rolling them over and got cash as they came due, it is just not possible to adjust taxes to cool down this amount of inflationary pressure. This is what happens in hyperinflation, the amounts are too large and things are “out of control”.

    • Robert Rice says:

      Vince, how likely is it the Chinese, in an instant, are going to become net importers, particularly on the level you are referring to? Slim to none. It isn’t ignorance, it is recognition of probabilities.

      Secondly, if they purchase our goods in droves such that inflation ramps up, they are purchasing our goods in droves at higher prices, which will push demand down and encourage Chinese domestic production, mitigating inflation.

      The likelihood of domestic bondholders all choosing not to reinvest after maturity, instead spending all that money into the economy, is also exceedingly unlikely. As I noted yesterday, the demand for U.S. bonds remains strong, and I see no reason for that to change anytime soon.

      What would it take to prove to you your beliefs are mistaken? What would you accept as evidence you are wrong? People who hold their views as unfalsifiable are obnoxious and intellectually dishonest. Don’t be one of those, the world’s full of them.

  18. Robert Rice
    Vince, how likely is it the Chinese, in an instant, are going to become net importers, particularly on the level you are referring to? Slim to none. It isn’t ignorance, it is recognition of probabilities.
    Secondly, if they purchase our goods in droves such that inflation ramps up, they are purchasing our goods in droves at higher prices, which will push demand down and encourage Chinese domestic production, mitigating inflation.
    The likelihood of domestic bondholders all choosing not to reinvest after maturity, instead spending all that money into the economy, is also exceedingly unlikely. As I noted yesterday, the demand for U.S. bonds remains strong, and I see no reason for that to change anytime soon.
    What would it take to prove to you your beliefs are mistaken? What would you accept as evidence you are wrong? People who hold their views as unfalsifiable are obnoxious and intellectually dishonest. Don’t be one of those, the world’s full of them.

    Hyperinflation happens over and over again. America has had it twice already (revolutionary war and civil war). You need to understand how and why it happens, not just say the probability is “slim to none” and ignore it. It is a real phenomenon in modern monetary systems. It did not happen when people used gold or silver coins. So it has something to do with fiat money.

    In hyperinflation when people are spending lots of money fast the prices just go up, not production. The real GNP always seems to go down. You need to understand why not just think that more money is always better.

    It is not that bond holders all choose all at once to not roll over their bonds. First it is a few, but that makes the central bank buy more, which makes inflation higher, which makes even more people want to get out of bonds. You can get a positive feedback loop that in the end has all bond holders selling. But it is not that they all decide at the same time. Sometimes hyperinflation takes years.

    Sometimes when central banks monetize debt they later unwind the move with “an exit strategy”. In this case I don’t expect this temporary monetization to cause inflation. I understand that Japan did some of this. But if you could find one case where a large fraction of a large debt (say at least 1/4 of a debt over 60% of GNP) was permanently monetized and there was no substantial inflation within 5 years I would admit I was wrong. Ok?

    There are over 100 cases where substantial monetization resulted in serious inflation. So what would it take to convince you that you were wrong?

    • A household is better off if it has more money. But a country is not like a household. If a country has more money it probably just means the price level is higher. Thinking that a country is like a household is a mistake.

    • Ben Wolf says:

      You keep referring to monetization of debt becoming a problem, but there is no such thing in our system because there is no debt. All that happens when Treasury sells a bond is an asset swap, reserves for bonds. Eventually the two get switched back, and the only money creation involved is the yield. The Treasury could dispatch $ 16 trillion in reserves to bondholders and the only thing that would happen is banks would be stuffed to the gills with non-earning assets.

    • Robert Rice says:

      Vincent, I have never argued hyperinflation hasn’t occurred or couldn’t occur. Rather, my comments were directed toward your proposed future hyperinflation-causing mechanisms.

      And so far your proposed mechanisms aren’t proving to be good reasons to believe hyperinflation is even likely let alone inevitable. On the one hand your proposed mechanisms occur over a short enough period of time to disallow a demand squelching government response through higher taxes and interest rates, while on the other hand these mechanisms must occur over long enough not to be regarded as silly. The problem is the more time you allow, the more time there is for a response and the more you undermine your own argument. If demand-pull hyperinflation rolls out over years, it will be preceded by increased demand and eventually increased inflation levels, and therefore it’ll be observable with the opportunity to respond accordingly to mitigate and prevent it through higher taxes and higher interest rates. This is why you can’t allow for a mutliyear time period, you have to propose these mechanisms occur quick enough to prevent a proper government response. But then why should anyone believe your mechanisms will occur over a relatively short period of time? I mean the FOMC meets eight times a year. The Fed could raise interest rates almost instantly. And raising taxes wouldn’t take more than six months. Are the Chinese going to dump trillions into the economy within six months? Is U.S. government debt going to be regarded as worthless and all that freed money spent into the economy within six months?

      I have never written money printing is always and in every instance the right course of action. You however seem to think it is counterproductive in every instance. And this belief is empirically, verifiably false. We know for a fact, given certain conditions, raising the level of money in the possession of spenders leads to demand increases leads to employment opportunites. This is abundantly conspicuous, so much so it is to be regarded as axiomatic.

      Out of curiosity, if we were using gold and silver coins, would you advocate we stop mining so as to prevent “money printing”?

      Look, the bottom line is, many of us are insisting running a deficit of sufficient size will solve our economic woes. You and others along your lines are standing in the way of the solution because of two false beliefs:

      1. We’ll go bankrupt from debt.
      2. We’ll create massive inflation.

      I think we can agree 1 is false; as you noted earlier you understand the Federal government is a currency issuer. Issuers can’t go bankrupt except voluntarily.

      With respect to 2, as noted above, we’re still waiting for a good reason to believe hyperinflation is coming.

  19. Ben Wolf
    You keep referring to monetization of debt becoming a problem, but there is no such thing in our system because there is no debt. All that happens when Treasury sells a bond is an asset swap, reserves for bonds. Eventually the two get switched back, and the only money creation involved is the yield. The Treasury could dispatch $ 16 trillion in reserves to bondholders and the only thing that would happen is banks would be stuffed to the gills with non-earning assets.

    Most people would call a Treasury bond a “debt” as it says the Treasury will pay back some amount of money in the future. That part about eventually they get switched back is not very accurate really. Governments almost never pay down their national debts. Eventually they will print for the full amount of the bond is a more accurate statement.

    I fully understand that with fiat currency they don’t run out of currency. That is not my point.

    My point is that in all historical cases of significant monetization that I have found (there have been many) there was significant inflation within 5 years unless the central bank reversed the operation by selling the bonds and destroying the new money. I understand that the MMT/MMR theories thinks that monetizing bonds is “just an asset swap” and not inflationary. I claim that does not fit with experimental results and so the theory, as it stands, is wrong. I claim you are very wrong when you think they could monetize the whole $16 trillion without any inflationary effect. I think we will be well into hyperinflation by the time they get 1/4th of that monetized. The history of hyperinflations is with me on this.

    Is anyone aware of any time in history when a government was able to monetize a large portion (like over 1/4) of a large national debt (like over 60% of GNP) and not get inflation? (without reversing the transaction) I think you need to find at least one example where monetizing is not inflationary. Many many times it was very inflationary.

    I think I know where the theory went wrong. You should view bonds as a government tool for controlling inflation, like taxes. And like taxes, you should imagine that they burn any money collected from bond sales. When they pay off a bond it is like issuing a stimulus check, it adds to demand. I think you need to modify MMR in this way minor but important way so that it matches reality. It also makes MMR more consistent, simplier, and cleaner. Imagine all money collected is burned. Will anyone agree with me on this?

    • Note it is not that I think they really burn money collected from bond sales (most is electronic anyway) or even that they burn money collected ad taxes, just that it is a good way to think about it. Since there is no limit to the amount of currency they can print, they could destroy all money collected and still not run out of currency. So the main impact in collecting taxes or money from bond sales is really how it helps control inflation. Taxes destroy some demand and bonds delay some demand for a time.

      With this modification to the theory, if people stop rolling over bonds and the government pays them all off then you could have a huge flood of delayed demand is released. This then matches experimental hyperinflation results.

  20. Cullen Roche
    Vince, I have zEro interest in banning you. But some of your hyperinflation comments are repetitive….thats all….no need to leave.

    Oh, glad to hear that. The problem is that different people come along and repeat the other side of the debate so I end up repeating some too. I try not to.

    • Vince,

      What makes you think a sudden decision by the non-government sector to spend a large portion of their savings (not on paying down privately held debt) would occur (thus leading to massive inflation and potentially hyperinflation)?

      What would “cause” this to happen?

      • The reason I ask is this gets to a point Cullen has often made… that hyperinflation is the result of “other” things… things that diminish productivity. Maybe it’s a war, or a natural disaster, etc that causes productivity to diminish. Then, all the excessive spending is a reaction to the underlying problem (the loss of productivity). So the excessive spending isn’t the cause of hyperinflation, rather it is a sympton of hyperinflation.

        • Robert Rice says:

          Indeed, severe supply reductions have caused real inflation problems. This is a good historical data point. However, even in Vince’s demand-pull hyperinflation scenario, the mechanism for hyperinflation he has proposed (100% loss of interest in bonds) if granted would not have the effect he claims. See my argument below.

  21. Robert Rice
    <On the one hand your proposed mechanisms occur over a short enough period of time to disallow a demand squelching government response through higher taxes and interest rates, while on the other hand these mechanisms must occur over long enough not to be regarded as silly.[…] This is why you can’t allow for a mutliyear time period, you have to propose these mechanisms occur quick enough to prevent a proper government response.

    The government collects $2.3 trillion per year in taxes. There is over $10 trillion in bonds coming due in the next 3 years. They have a deficit like $1.4 trillion per year. If bonds were not rolled over at $3.3 trillion per year and a deficit of $1.4 trillion then as things stand they would need like $4.7 new money per year. You think taxes can go from $2.3 trillion $7 trillion per year? What policy response could possibly keep them from printing money like crazy?

    There have been many many cases of hyperinflation. They often go for years. There is always lots of “government response”. Once the hyperinflation starts they almost never stop it till the currency is worthless. The US has the groundwork of debt over 80% of GNP and deficit over 40% of spending and bonds are mostly short term. In these conditions it is just really hard not to make a lot of new money if people don’t want your bonds. If they raise interest rates then the interest payments go up fast since most of the bonds are short term. It is already taking 1/4 of the taxes, so if it gets to 1/2 the taxes or more that does not really make bond buyers confident. Can you double the taxes? Cut spending by 40% without “austerity crashing the economy”. How should all of these other governments that could not get out of hyperinflation have gotten out of it once in the setup conditions?

    • Robert Rice says:

      I will accept the above is a much more realistic temporal presentation of your thesis. It sounds like you’ve ironed out the temporal problem I argued as a rebuttal previously, and I accept that. Although there is one temporal problem remaining; you indicated these bonds are maturing over the next few years. You must expect interest in bonds to begin fading very soon then, yes?

      As part of your presentation, I would like to see some accounting. Please provide references for the numbers you’ve presented.

      Assuming these numbers are in fact correct, I don’t accept your premise that people will behave in the way you suggest. Along similar lines to JK’s question above, why do you expect people to cease rolling over their bonds, not reinvesting the money in some other financial asset, but rather spending it into the economy? I don’t feel particularly obligated to provide solutions to an event that doesn’t strike me as remotely likely to occur.

      But let’s assume it did occur. What’s about to follow should allow us to settle the debate. Suppose you’re able to provide evidence for the numbers, and suppose a total loss of interest in bonds in fact occurs, supposing further the money wasn’t reinvested into some other asset, but was spent in total into the economy over a few years. Suppose I grant your entire thesis. You had asked whether we could realistically raise taxes and interest rates to offset 3+ trillion of new demand. Well, in substantial part we wouldn’t have to. Remember, my thesis (one I believe shared by a number of people here, but I won’t speak for them) calls for increased Federal government deficits. We wouldn’t have to run these deficits in your scenario. Three trillion is about 20% of GDP. Some portion of that would likely bring the domestic economy close to full employment, the remainder seems realistically removed from the economy via taxes. These tax increases could be sold to the public as an inflation preventing, deficit eliminating policy, making them doubly attractive.

      Heck Vince, you’ve found an alternative way to save the economy without government money creation. Let’s hope all entities cash out their bonds and spend the money into the economy.

    • Vince, just curious… when do you expect hyperinflation to begin? It seems our current environment of year-after-year trillion+ deficit spending, plus near zero rates of return on government bonds, is the storm your talking about.

      What’s your timeframe/prediction?

  22. Michael Sankowski
    Have you read this post:
    http://traderscrucible.com/2011/03/11/mmt-flogs-bill-gross-in-the-public-stockade-and-where-can-you-put-an-ocean/

    I agree that theoretically if every dollar the government spent were invested in buying government debt we can prove that there is always enough money to buy up all of the government debt. This was of course true of all other hyperinflations as well. It does not mean that people will invest in government debt when the yield is less than inflation. Historically people really do start getting out of government bonds and you get a positive feedback loop.

  23. Robert Rice
    Assuming these numbers are in fact correct, I don’t accept your premise that people will behave in the way you suggest. Along similar lines to JK’s question above, why do you expect people to cease rolling over their bonds, not reinvesting the money in some other financial asset, but rather spending it into the economy? I don’t feel particularly obligated to provide solutions to an event that doesn’t strike me as remotely likely to occur.
    […]
    Heck Vince, you’ve found an alternative way to save the economy without government money creation. Let’s hope all entities cash out their bonds and spend the money into the economy.

    There is a book by Bernholz on hyperinflation where he studies many hyperinflations and finds that it happens after a government gets debt over 80% of GNP and deficit over 40% of government spending. So the evidence is that in these conditions you probably get hyperinflation.

    Lots of money getting out of bonds never saved any of these other 100 economies, it just made prices go up. Why do you think all this money will save the US economy?

    Hyperinflation is partly a human panic to get out of bonds and then out of a currency that feeds on itself. The more people get out the more the central bank prints and the more important it is to get out. But since it is a human thing it is not trivial to predict exactly when it will happen. So while I am willing to place a $200 bet on longbets that the US dollar gets hyperinflation within the next 5 years, I don’t in any sense “know” it will happen then.

    However, I do think I know that theory of MMR does not match the reality of experimental evidence when it comes to monetizing bonds and inflation. Please see and respond to other comments here.

    • There are many historical cases where the central bank monetizes a large portion of the national debt and you get hyperinflation. MMR says that monetizing bonds is “just an asset swap” and not inflationary. I say the evidence contradicts MMR. Can anyone find a single historical case where over 1/4th of a national debt that was over 60% the size of the GNP was monetized and they did not get run away inflation within 5 years?

      It seems like the MMR position is that the hyperinflation is due to war, or collapsing output capacity, or inability to tax, or regime change, or anything else but monetizing the bonds. If this is true there should be at least one historical case where they were able to monetize the bonds without getting inflation.

      I think the MMR position is like trying to ignore a pink elephant in the middle of your theory of fiat money. Trying to say that hyperinflation is a political phenomenon and not a monetary phenomenon is just a way to ignore the fact that your theory does not fit the reality of fiat money.

      I understand the math for hyperinflation in fiat money. You say “that is politics and outside a theory of fiat money”. I call BS.

      http://pair.offshore.ai/38yearcycle/#hyperinflationmath

      • Vince,

        Suppose we accept for the moment that what modern money people call an asset swap, is actually debt monetization (that’s what you’re saying right?)

        I’m confused about why you think these trillions of dollars would get dumped into immediate consumption? (thereby causing inflation and possibly hyperinflation)

        Where do you think this money is going to be spent? People aren’t going to start eating 10x more food than they do now. They’re not going to start buying 20 automobiles each etc.

        In what sector would trillions of dollars of “sudden” spending even occur? Assets? ..housing, gold?

        And also, if people were not happy with their rate of return on government bonds, and therefore in response began creating all sorts of asset bubbles, couldn’t the Fed just lure them back to financial assets (e.g. government bonds) by raising the interest rate?

        I’m confused about how/why you think things will get out of hand? I tend to agree with MMR that so long as productivity is relatively high, i.e. there are things we want to buy, there’s no reason we’d collectivelly lose faith in the dollar. In fact we all have a vested interested in collectively maintaining faith in the currency, don’t we? I’d lose faith if in the dollar if there was nothing to buy with my dollars, but so long as there are things to buy, what’s the problem?

        Also, I’d start to lose faith if we got massive inflation, but again… what would “cause” the spending to get so out of hand as to cause massive “demand-pull” inflation?

        • Vince,

          also.. you said “This is a point where I disagree with MMT/MMR. I think bonds are a way the government can delay demand.”

          It sounds like you think government bonds are coercion, but in reality they are just a “reaction” to the non-government sector’s desire to save.

          Taxes are coercion, for sure. We don’t decide “hey I’d like to destroy some of my money,” and then the U.S. government reacts by saying “ok, here give it to the government. we’ll destroy it for you (via taxation)”

          Whereas it’s the opposite for government bonds. We do decide “Hey i’d like to save some of my money,” and then the U.S. government reacts by saying “ok, here is a risk-free treasury security. we’ll hold onto it for you”

          Imagine hypothetically if no one ever wanted to save money in financial assets… wouldn’t there be no government bonds then?

          What am I missing?

      • Robert Rice says:

        I think I’ve granted your demand-pull hyperinflation thesis in full and found that not only does it not cause hyperinflation, it helps the economy. Isn’t that the bottom line? I don’t see what value there is to fixate on whether some examples of hyperinflation are demand-pull versus cost-push historically. Who cares? We can see your thesis doesn’t bear itself out regardless of the historical footnote.

    • Robert Rice says:

      I don’t think anyone is looking for you to give an exact date of when hyperinflation will unfold–you don’t have a crystal ball. Rather, people are looking for you to elucidate realistic mechanisms and conditions which will lead to the fulfullment of your prediction.

      You asked why it is the Fed monetizing debt will lead to demand increases. This is what your thesis asserts, i.e. as bonds are cashed out by the Fed, this increases the cash holdings of bondholders which will, according to your thesis, lead to demand increases, which I would add will lead to employment opportunities. Your thesis is a demand-pull hyperinflation thesis. So assuming your scenario, we allow the increased inflows of cash into the economy to raise demand as needed to bring us much closer to full employment, and the excess we tax away to fund the deficit. The result is the government runs no deficit, demand is increased in the domestic economy, and any surplus is destroyed or stored for a rainy day (we could save for the deficit in year four, for example.)

      It is worth noting much of this influx of money will be transient and lost in a trade deficit, which like taxes, draws down demand on the domestic sector.

      And whether this has already occurred historically is irrelevant. True conclusions depend on true premises and valid inference, not on previous occurance. Where is the false premise or the invalid inference in my arguments? You don’t seem to be responding to the meat of my prior correspondence. Based on the numbers, it is very realistic 10 trillion in three years can be managed.

      We have about a 1.5 trillion yearly deficit. We can raise taxes to fund all of this over the three year period in question. We might even spend some more of this money to cover some other needed projects, like infrastructure retooling. This alone cuts the money to account for in at least half and eliminates our deficit spending for these years. We have 5 trillion left, 1.7 per year. If you think 1.7 trillion per year can create hyperinflation in the context of an underproducing economy with high unemployment in a country with a GDP of 15 trillion, I don’t believe that’s realistic.

      Where’s the error with how I’m suggesting we can manage the influx of money to prevent inflation problems?

      • Robert,

        You’re logic seems sound to me.

        Ah! A light bulb just turned on in my head! I think I understand now why Vincent is making the argument that he is, and why he’s mistaken. He’s starting from the same premise that macroeconomic textbooks often start from:

        They are “starting” at full employment/full productivity. So when you start there, then Vincent’s argument makes sense… trillions of dollars of new spending would cause inflation because we’re already at full employment and full productive capacity, i.e. the money can only push prices upward.

        Incidentally this is one of the problems with the Quantiy Theory of Money. It “starts” at full employment/full productivity. As one critic of the QTM says: “Students forget the assumptions made in the model and just remember that increases in the money supply lead to increases in the price level.”

        • Robert Rice says:

          You’re exactly right. I made this point with Vince in a recent prior article:

          “I often hear from those who ascribe to the quantitative (sic) theory of money that inflation results because a greater quantity of money chases the same quantity of goods. But the auxiliary hypothesis left out is the assumption the country is already near or at productive capacity. The fact is, in an underemployment/underproduction environment (like we find ourselves in currently), the greater quantity of money does not chase the same quantity of goods, it chases a greater quantity. A greater quantity of money encourages higher production–demand raises supply. So you have a greater quantity of money chasing a greater quantity of goods, that is until we approach full production.”

          http://monetaryrealism.com/inflation-prediction-up-at-longbets-org/

          The quantity theory of money ignores employment/production levels and the effect of such on prices. Full production/full employment is assumed. They also assume prices are perfectly fluid (non-sticky), instantaneously reacting to money supply changes. Money creation is thought to be intrinsically inflationary with a direct, proportional relationship on prices (assuming velocity is constant). But as I noted elsewhere, if prices always rise proportionately to increases in the money supply (holding velocity constant), real demand (calculated as an aggregate of end user transactions) would never rise. But in an underproducing economy a rising money supply does raise demand.

          This perfect efficiency between money creation and price increases in QTM should be doubtful on its face given the price change mechanism is businesses composed of people making price decisions often for anything but perfectly rationally/efficient reasons or timing. Demand-pull inflation is very much about aggregate business confidence in increasing nominal profits through increased prices.

          QTM leaves out the human element to price setting, rather holding as an assumption prices are set mechanistically. It is as if businesses have no control over prices, they simply auto-adjust relative to money supply or velocity changes. This assumption is ridiculous on its face.

          At a minimum QTM needs to add a variable or two to the M*V side of the equation–one for production levels, another for aggregate business psychology/confidence.

  24. JK
    Robert,
    They are “starting” at full employment/full productivity. So when you start there, then Vincent’s argument makes sense… trillions of dollars of new spending would cause inflation because we’re already at full employment and full productive capacity, i.e. the money can only push prices upward.

    You have this idea that if there is unemployment you can’t get inflation. There seems to be no data supporting this claim and lots of data contradicting it. There was a graph posted here recently that showed that in no way does unemployment prevent inflation.

    To me realism means “If it is real we believe it”. And real means in the real world. Is that not what you guys mean?

    • Robert Rice says:

      You are not representing your argument correctly. This isn’t a question of real versus imagined as you suggest. Your argument is:

      P: If it hasn’t occurred, it won’t/can’t occur.
      P: It hasn’t occurred.
      C: Therefore it won’t/can’t occur.

      And I’m rejecting your first premise–it is false–while asserting the second is irrelevant. Whether it has or hasn’t occurred previously is an interesting historical footnote, it is not however a litmus test for a sound argument. An argument is sound if it is valid and has true premises. You’ve failed to point out invalidity or false premises in my arguments. Whether what I’m proposing has occurred historically is interesting trivia and nothing more.

      And this idea that it hasn’t occurred therefore it won’t or can’t occur is self-refuting. The writing of this very claim at some point in the past was a new event demonstrating events which haven’t occurred previously do occur.

      If the first premise above were true, nothing would have ever occurred. Quite obviously events occur. To avoid this, you would have to believe in some kind of infinite regress with no beginning where all current events are merely reoccurances of past ones. Certainly nothing new under the sun would have ever occurred. But new events have and do regularly occur, agreed? Where does the saying, “There’s a first time for everything,” originate if not from an observation that new events occur?

      Focus on the validity of the arguments and the truth value of the premises, not on the historical footnote.

  25. Robert Rice
    And whether this has already occurred historically is irrelevant. True conclusions depend on true premises and valid inference, not on previous occurance. Where is the false premise or the invalid inference in my arguments?
    […]
    Where’s the error with how I’m suggesting we can manage the influx of money to prevent inflation problems?

    A theory should match reality. A theory of fiat money should match all previous data for fiat money. If your theory says paying off bonds with new money is not inflationary, while everyone else thinks that monetizing bonds is inflationary, the way this is supposed to be settled is by looking at the historical data. All the data I see says that monetizing large amounts of debt eventually results in serious inflation.

    I think you need to read my math again and then look at yours again. I said you would need to get taxes from $2.3 trillion per year to $7 trillion per year to avoid making money just by raising taxes. You start by saying raise taxes to cover the deficit. Well, adding $1.5 trillion or so to a $2.3 trillion tax base is just not possible. So I think you are not facing reality. And even so you never get close to $7 trillion without doing things like taking people’s money to spend on infrastructure without calling it taxes.

    • Robert Rice says:

      I agree, the empirical data should be consistent with any theory. How is the data to which you refer inconsistent with my theory? As I’ve pointed out before in prior conversations with you on the same topic, my theory also accounts for this same data.

      What you are doing is making the mistake in reasoning I noted above, taking a historical footnote and suggesting it has to be a litmus test for an argument. “If it hasn’t occurred, it can’t occur.” This is nonsense. Your insistence on it having occurred previously is a red herring.

      If you really want to test my thesis versus yours, we need a critical experiment, the proverbial eclipse to test it (you’ll recall an eclipse is how they initially tested Einstein’s relativity versus classical physics). Our two theories make different predictions given a certain set of conditions. Which of our theories ends up consistent with the data post-experiment would settle it. But as it stands currently, existing empirical data is not inconsistent with my thesis.

      And your math isn’t much better. Taxes would not have to go to 7 trillion a year. From 2.3 trillion to 7 trillion is a difference of 4.7 trillion per year, which over the period of three years is 14.1 trillion. However we are only having to account for 10 trillion, not 14. And again as I noted previously, we would not have to tax all of that 10 trillion back out of the economy. At least some of the difference could be used to increase aggregate demand and help with our underemployment.

  26. Robert Rice
    You don’t seem to be responding to the meat of my prior correspondence.

    I feel the same way. I can never get anyone here to look at the fact that historically monetizing bonds really does cause inflation, contradicting the claims of MMR . Yes, making new money to buy government bonds is “monetizing debt” no matter what else they may call it. I have 121 names for this kind of thing so far.

    I can never get anyone to look at any arguments with the Equation of Exchange or the math for hyperinflation. This fits reality. It explains what really happens. It is not very complex math. Yes, no one responds to this.

    http://howfiatdies.blogspot.com/2010/11/euphemisms-for-printing-money.html

    http://pair.offshore.ai/38yearcycle/#hyperinflationmath

    • Vince,

      I really think we’re going to need some of those hyperinflationary examples that didn’t involve some other gross tragedy of gov’t, such as: huge drop in productive capacity, war, regime change, foreign donominated debt (often these all kind of go together).

      Basically, a government can do all sorts of horribly stupid things that it will try to print its way out of and be unsuccessful because it simply does not have the faith of its own people, productive capacity, etc. Zimbabwe’s printing was an attempt to paper-over huge, glaring, awful mistakes that severely hampered its productivity and social cohesion. It’s important that we don’t ONLY look at the money printing, but also look at the underlying economy.

      The U.S. is the most potentially productive economy in the nation, with trust of private property unlike 99% of other countries, and much less corruption than we see in most countries, and a ton of dynamic minds. Basically, there’s a reason to believe that the US can continue to remain productive for a long time, and that US dollars will be a decent claim on that production. We really, really need some examples of these hyperinflations, and not just links to websites that try to talk about fiat money like it’s the source of all problems. A gold standard would not have kept tragedy from striking Weimar & Zimbabwe, and I’m willing to bet any other example of hyperinflation. The core problem is just as much about the other crimes of gov’t that got people to reject currency in the first place as it is about money going bad.

    • Robert Rice says:

      No one has argued that monetizing bonds cannot create hyperinflation. Again, this data is not inconsistent with my thesis. I agree, monetizing bonds can create hyperinflation, but it doesn’t have to. You have to prove that it does necessarily cause this. Your data does not prove it has to, only that it can, and this is why the data is not inconsistent with my thesis.

      Even if I granted every past historical occurance of monetizing bonds resulted in hyperinflation, this does not prove it must happen. I’ve given you an argument for why it wouldn’t happen in our instance. You need to respond to that, instead of saying, “Well monetizing bonds without hyperinflation hasn’t happened before.” Whether it’s occurred previously is irrelevant for the aforementioned reasons.

      • Robert Rice says:

        And btw, I’ve made more than one argument against the equation of exchange used in the quantity theory of money to calculation inflation. See my post above on this very subject. No one is ignoring your arguments as you claim.

  27. JK
    It sounds like you think government bonds are coercion, but in reality they are just a “reaction” to the non-government sector’s desire to save.
    Taxes are coercion, for sure. We don’t decide “hey I’d like to destroy some of my money,” and then the U.S. government reacts by saying “ok, here give it to the government. we’ll destroy it for you (via taxation)”

    Just look at the accounting. The citizen has some money and gives it to the government. The government does not need the money since they can print money, so they could burn it. So far this is the same for both taxes and bonds. The impact it has on demand is the same no matter if the citizen is forced at gun point to turn over the money or does so willingly.

    Now look at another accounting situation. The government issues a stimulus check to somebody. The citizen has more money. Demand is increased. Well, the pay out for a bond has the same accounting. The impact for demand is the same from a stimulus check as from the payoff for a bond.

    So as far as the impact on inflation, a bond is like a tax and then a stimulus check. Inflation does not care if the citizen gave up the money willingly or not.

    • No, Vince… the person who receives a stimulus check has more money, and, more importantly (if we’re still debating what exactly “money” is), more NFA’s on their balance sheet. However, if somebody’s treasury bond is paid off, they arguably have the same amount of money (bonds are money), but, more importantly, their financial asset purchasing power hasn’t changed one bit. Changes in the Equity balance of peoples’ financial balance sheets drive the economy much more than whether some of that financial balance sheet is made up of treasury bonds vs cash.

      I have another example for you. Let’s say that the gov’t enacted “stimulus spending,” but instead of sending everyone a check for $2,000, they set them up with a treasury direct account for $2,000 each in 1 year T-Bills. Do you really think that people would look at it much differently than if they had received $2,000 in cash? No. Why? Their balance sheets, debt service, and disposable income drive their decision to save/spend much more than the type of assets on their financial balance sheets. So, really, when bonds are paid off with cash, for people with too-little savings (ie, the USA), they’re going to either keep it in cash, buy a new bond, or shoot for better return by lending it out to a riskier party.

      Once again (and maybe you’ve answered this for me elsewhere), please show me an instance of hyperinflation that didn’t involve REAL outside events that made people question either the future existence/clout of their government, or productivity of their economy. These are the real things that will get people to reject their savings, because they’ll realize, then, that there’s really no future hope of something to save for. This seems like SO much more of a driver than what fiat assets I’m holding… but I’m an accountant, so I view things in terms of balance sheets & cash flows.

      • Robert Rice says:

        I think Vince’s point is one of liquidity. While a bondholder’s NFAs do not change with a QE style asset swap, their liquidity does. He’s suggesting this increased liquidity will result in increased spending and increased demand.

        What I’ve done above is grant his entire thesis for the sake of argument, as a thought experiment, to test it: Suppose Vince’s numbers are accurate and 10 trillion in bonds will mature over the next three years. Suppose a complete loss of interest in bonds occurs for whatever the reason, and suppose all that money is intended to be spent into the economy. As argued above, we still do not end up with hyperinflation. Instead we fund our deficit while also increasing aggregate demand, thereby lowering unemployment.

        In all actuality, if everyone dumped bonds, interest rates would skyrocket, and lending would grind to a hault. This would dramatically reduce demand, sufficiently I would conjecture to completely offset the demand increases. Granted we are in a recession based on excess debt so lending isn’t quite as hot of a commodity right now, but even now lending is still and integral part of demand creation. Imagine what would happen right now if interest rates skyrocketed? Demand would crash, housing prices would drop through the floor, deflationary pressures would counteract any inflationary pressures from the influx of money in part if not entirely.

  28. Robert Rice
    I agree, the empirical data should be consistent with any theory. How is the data to which you refer inconsistent with my theory?
    […]
    And your math isn’t much better. Taxes would not have to go to 7 trillion a year. From 2.3 trillion to 7 trillion is a difference of 4.7 trillion per year, which over the period of three years is 14.1 trillion. However we are only having to account for 10 trillion, not 14.

    MMR says that making new money to pay off bonds (usually called monetization) does not cause inflation. But in every historical case of substantial monetization there has been substantial inflation within 5 years.

    You forgot the 1.4 trillion or so deficit per year, which after 3 years and added to the 10 gets you to the 4.

    • Gets you to the 14.

    • Robert Rice says:

      I think their point is that if after an asset swap the reserves sit in bank accounts, that money is not creating demand since it isn’t being spent. I don’t think their point is cashing out bonds couldn’t create inflation if that money were spent into the economy. Rather they, like me, just don’t see this bond dumping spending binge as very likely.

      Again, you have to give us a good reason why everyone is going to lose interest in bonds and spend the savings into the economy. And even if you can think of one, we still don’t have hyperinflation for the aforementioned reasons.

      Why would you add the 4.5 trillion in deficit spending over three years to the 10 trillion, when half of the 10 trillion can be used to fund the 4.5 trillion deficit?

  29. Robert Rice
    Suppose a complete loss of interest in bonds occurs for whatever the reason, and suppose all that money is intended to be spent into the economy. As argued above, we still do not end up with hyperinflation. Instead we fund our deficit while also increasing aggregate demand, thereby lowering unemployment.
    In all actuality, if everyone dumped bonds, interest rates would skyrocket, and lending would grind to a hault. This would dramatically reduce demand, sufficiently I would conjecture to completely offset the demand increases.

    Historically when there is such a “bond panic” you get hyperinflation. Lets try to see why. First note that hyperinflation seems to require a huge debt and a huge deficit. One or the other alone is not enough. So always keep both in mind when looking at what is going to happen. Also, keep in mind that usually people have moved to short term bonds.

    As we start into hyperinflation bank lending does grind to a hault. But the government deficit is sill here. So the Central Bank is still “loaning” huge amounts to the rest of the government (often called “printing money” since it is almost never really paid back). As prices go up the amount the government has to borrow goes up (government union employees have some of the best inflation protection out there). The rest of the economy is getting wipe out by the hyperinflation, in part because credit is frozen up, so GNP is going down. This adds to the inflationary pressure. Probably taxes go up because suddenly people are realizing that deficits do matter, but this hurts GNP too.

    Ok. Here is a challenge. There are many cases where people decided they did not want to hold some countries bonds (always assume I am talking about a country that prints is own money because that is a requirement for hyperinflation). I don’t really think this improved employment in any. Do you? Certainly in hyperinflation the average real salary plummets and many people lose their jobs. Why do you think these conditions:
    debt over 80% of GNP
    deficit over 40% of government spending
    most government bonds now short term bonds
    people getting out of bonds so central bank is buy more and more

    Which in every other case seem to result in hyperinflation would be good in the US case? Why would it be different than all the others?

    • Vince,

      Can you provide an example, from any of the hyperinflation examples, where it was purely a monetary phenomenon? What several of us are suggesting is that.. sure, there maybe be correlation, but not necessarily causation.

      Therefore if you can provide a hyperinflation example that wasn’t accompanied by a negative supply shock, that would bolster the argument you are making.

      • That^

        Especailly when it’s one of the most productive, potentially productive, free, prosperous, powerful nations in the world… but we’ll settle for just a more simple, bread/butter, hyperinflation examples for now.

        I’m starting to think more and more that the inflation is just incidental to the complete lack of faith in gov’t or production… and if these countries were running small deficits & not monetizing debt, and were on the gold standard, I’m willing to bet their disasters would have been slightly different in nature but similar in ultimate result: An utterly tattered country in economic ruin.

    • Robert Rice says:

      I already answered this.

  30. Robert Rice
    And btw, I’ve made more than one argument against the equation of exchange used in the quantity theory of money to calculation inflation. See my post above on this very subject. No one is ignoring your arguments as you claim.

    I did not recognize that as related to my hyperinflation math or equation of exchange. I have not used the term “quantity theory of money” and in no way claimed that velocity of money is fixed. In fact, the math for hyperinflation says the velocity of money goes up. I have also said that initially when a government starts monetizing debt (maybe years before hyperinflation) they push interest rates down which lowers the velocity of money (see hussman paper). This lowering the velocity money compensates for the initial increased quantity of money and so delays the inflation onset. Can you comment on the hyperinflation math or monetization/interest-rate/velocity of money delaying the onset of inflation? Thanks.

    • Robert Rice says:

      The equation of exchange is the quantity theory of money formulated into an equation. They are one and the same.

      And you completely missed the point on holding the velocity of money constant.

      Anyway, look, it seems apparent you are unwilling to acknowledge any error.

  31. Dan M.I have another example for you. Let’s say that the gov’t enacted “stimulus spending,” but instead of sending everyone a check for $2,000, they set them up with a treasury direct account for $2,000 each in 1 year T-Bills. Do you really think that people would look at it much differently than if they had received $2,000 in cash? No. Why?

    Once again (and maybe you’ve answered this for me elsewhere), please show me an instance of hyperinflation that didn’t involve REAL outside events that made people question either the future existence/clout of their government, or productivity of their economy. These are the real things that will get people to reject their savings, because they’ll realize, then, that there’s really no future hope of something to save for. This seems like SO much more of a driver than what fiat assets I’m holding… but I’m an accountant, so I view things in terms of balance sheets & cash flows.

    The stimulus bonds to people is a good argument. :-) The shorter the period on a bond the less it delays demand. Clearly a 1 month bond will have more immediate impact than a 30 year bond. And yes, if people know they are getting money a year form now many will spend more today.

    The bad things like lower real GNP, political instability, and foreign debt are very much a part of hyperinflation. You claim that these cause hyperinflation. I claim this is just part of the picture. If the USA got hyperinflation today it would be borrowing foreign money to buy oil within a month. I am sure of it. You claim the lower real GNP can lead to hyperinflation. But every hyperinflation seems to have lower real GNP as part of it. Things are a mess. And does the political instability cause the hyperinflation or the hyperinflation cause the political instability. It is hard to say because really they go together. So this is why you should not expect to find a healthy economy with a stable government and no foreign debt but with but with hyperinflation. It is like asking for a historical example where the world was falling apart and everything was fine at the same time.

    • VC,

      I really, really, really think that first paragraph is where you’re getting things wrong. People save out of a will to consume in the future. Only after that decision is made, does the market react by providing savings opportunities that can return value. You almost seem to be saying that the bonds and their duration drive the will to save. This just isn’t how people operate. I’ll even say the reverse (and this is an even more fun example)… if people were holding bonds, and ony bonds.. cash was just what bonds spit out. They’d FIND a way to be able to consume with those bonds… and liquidity is less a concern than ever before, because with computers and financial markets you could probably turn any common financial security into a common form of money if our economy deemed it efficient. Liquidity is kind of a misleading term in this day and age, especially when we’re talking about whether people have the will to save vs spend, vs the financial instruments that will allow them to do so. I think we need to discuss that term further, because IMO this is where you’re making big assumptions that just don’t apply.

      If we do look at hyperinflation and the other things that correlate with it as just one big picture, I’m ok with that for now, because they are all intertwined (though I’d say it’s not just production, but productive capacity, so using GNP is a mistake), but look at the huge non-monetary challenges/problems all of our 20th century hyperinflation countries had going against them. Most of them had lost a war and had to pay huge reparations and had a crushed productive capacity. Zimbabwe had a horribly, horribly corrupt government. We live in one of the fairest countries in the world.

      You can’t tell me that these traits had much to do with management of monetary policy beforehand, and couldn’t have been a pretty big cause of the total picture we call hyperinflation… I mean maybe somehow monetary policy kicked off WWI, which caused the following hyperinflations, but I think really what is needed is a “perfect storm” of really friggin’ bad things, including gov’t trying to paper over the other bad things, for hyperinflation to happen. Because without the other bad things, people will remain pretty confident about the future, still desire to save, still have the ability to produce, etc. You won’t have that event horizon of mass spending into a non-productive economy. This is the driving reason the 1970’s didn’t result in hyperinflation. It was just annoyingly bad inflation, which wages, and interest rates (at times) kept up with.

  32. Dan M.
    That^
    Especailly when it’s one of the most productive, potentially productive, free, prosperous, powerful nations in the world… but we’ll settle for just a more simple, bread/butter, hyperinflation examples for now.
    I’m starting to think more and more that the inflation is just incidental to the complete lack of faith in gov’t or production… and if these countries were running small deficits & not monetizing debt, and were on the gold standard, I’m willing to bet their disasters would have been slightly different in nature but similar in ultimate result: An utterly tattered country in economic ruin.

    The absolute size of the economy does not seem to change how hard it is to get hyperinflation. This 80+% debt to GDP and 40+% deficit to spending does not change with the absolute size of the country. I don’t believe that size along would save the USA.

    The fact that it is the “international reserve currency” may make things substantially different but it is hard to say. We have never had a world reserve currency get hyperinflation before. Maybe in this case it takes longer. Maybe things happen faster.

    Countries have certainly been ruined while on the gold standard. Also, leaving the gold standard and then getting hyperinflation on a brand new fiat currency is very possible. That is really what America did in the revolutionary war and also the civil war. So it is not really that a country with a gold standard can not get hyperinflation, it is that they can not get it without leaving the gold standard, which they can easily do.

    • I feel like Vince continues to commit a logical fallacy, but I can’t put my finger on. Where’s Tom Hickey?

    • VC,

      What about the US or Britain during WWII? Why didn’t they hit hyperinflation, as they had massive deficits/debt?

      Are there instances of economies hitting your “wall of hyperinflation,” but then going back below those threshholds later on?

      Where does Japan fit into that analysis, and do you think they’d hit hyperinflation if they started runnign 40% deficits?

      I’d imagine that hitting these threshholds results in one of two things:

      1) The economy, which now has enough fiat money for inflation to really kick in, but is still stable with a solid productive capacity and other stable underpinnings, increases its nominal GDP enough to the point where they’re no longer at this “death ratio” that VC seems to think we’re at. I’d assert that how we came out of WWII is probably a great example of this.

      2) The other way is that the country cannot absorb the inflation through production, and people realize this, the government tries to print over its inherant flaws, and boom goes the dynamite.

      Now of course Vince’s “death ratios” always hold because the countries that come out of it without hyperinflation naturally operate at a level of nominal GDP that keeps them out of that scenario, thus giving him a stunted view of everything, because every example that didn’t result in hyperinflation went back to being back within the health debt & deficit to GDP zone.

      Not to mention, as he said, we’re the world’s reserve currency, so we naturally have to run larger debt/deficits to service that role.

  33. Robert Rice
    Why would you add the 4.5 trillion in deficit spending over three years to the 10 trillion, when half of the 10 trillion can be used to fund the 4.5 trillion deficit?

    I am looking at how much “new money” has to be created in the “bonds are not money” view. If 10 trillion in bonds are paid off with new money and 4.5 trillion in deficit is funded with new money then the total for new money is $14.5 trillion. Over a 3 year period that is a lot of new money.

    Imagine that China had 10 trillion in 1 year bonds (just pretend) and when it came due wanted to be paid in green pieces of paper with pictures of dead men on them. How do you propose to use half of that 10 trillion to fund the US deficit?

    • Vince,

      I don’t want to speak for Rodger here, but what he might mean, given your China scenario here, is that China’s increased spending would boost U.S. aggregate demand and therefore employment, which would offset a lot of deficit spending (that is currently occuring due to automatic stabilizers, e.g. unemployment insurance).

    • Robert Rice says:

      Well, there’s no reason to look at it that way except as a self-serving exercise to support your thesis.

      • Robert Rice says:

        And btw, I already answered how the government could use the money to fund the deficit. Increase taxes. I’m not sure what’s difficult to understand here.

  34. Dan M.
    I’ll even say the reverse (and this is an even more fun example)… if people were holding bonds, and ony bonds.. cash was just what bonds spit out. They’d FIND a way to be able to consume with those bonds… and liquidity is less a concern than ever before, because with computers and financial markets you could probably turn any common financial security into a common form of money if our economy deemed it efficient. Liquidity is kind of a misleading term in this day and age, especially when we’re talking about whether people have the will to save vs spend, vs the financial instruments that will allow them to do so. I think we need to discuss that term further, because IMO this is where you’re making big assumptions that just don’t apply.

    So I think more in terms of “velocity of money” than really “liquidity”. And when people are holding bonds these don’t seem to change hands that much. And when people are getting out of bonds you should expect the number of transactions per year to go up. Maybe the bonds make it harder. Maybe they only hold bonds when they don’t want to buy anything. But if you count bonds as part of the “M” in your equation of exchange then you will see a higher “V” when much of that M goes from bonds to cash in historical examples. I am sure of this. Do you agree?

    • V would tend to increase somewhat because there’s usually less of a benefit of holding an asset that issues less interest. However, this is all relative to peoples’ disposable incomes, debt-service considerations, and balance sheets. Right now we have a really high debt overhang that people are trying just to service, much less pay down quickly. When debt service is tight, these are much bigger considerations to the demand form money in a society than whether you’re holding bonds vs cash on the asset side. It’s like saying that having extra airbags will cause us to drive more carelessly on glare ice next to the edge of a cliff… not really!

  35. Dunce Cap Aficionado says:

    It is indeed symbiotic.

    But lets all remember, a parasite is simply a failed symbiote.

  36. Dan M.
    People save out of a will to consume in the future. Only after that decision is made, does the market react by providing savings opportunities that can return value. You almost seem to be saying that the bonds and their duration drive the will to save. This just isn’t how people operate.

    MMT/MMR has a story that the government just sells bonds because the people want to buy them. It is just not the whole picture.

    People save because they want their future to be better. But if the money is dropping in value fast they are better off buying things today. When things get really hard to where people don’t have but 2 months worth of living expenses if tuna is going up at 10% per month and their bank pays 1% per month their future is better if they buy extra cans of tuna, which they will eat, than just putting the money in the bank. This is the reality during hyperinflation. Banks don’t pay as much as the inflation rate. So putting your money in the bank makes you worse off. Not sure how to get this point across.

    Many times economists assume people act in their “rational self interest”. If you assume this then they buy things they will need in the future rather than put their money in the bank. This is what happens.

    • Vince,

      But you have to get us to a point where “peoples’ savings is dropping in value FAST.” You haven’t gotten us there yet… you simply state that we’re already there and it’s all self-fulfilling doom at this point. People are losing about 2-3% per year by holding cash & even treasuries. However, these people not only have the option to buy corporate bonds, munis or stocks, which can fund real growth & wealth creation, they also have only a few months of savings before their home might be foreclosed on.

      The default risk due to most people’s lack of savings is a much bigger consideration than inflation risk on the little savings they do have. I think this all comes down to us being the world’s reserve currency, and the fact that even though our gov’t has printed tons of NFA’s, too many of them are sitting on overseas balance sheets and not enough in our checking/savings accounts. This will keep demand for money quite a bit higher, as we almost should be considering other country’s GDP in our “debt-to-GDP ratio,” as their economies are really included in the activity and savings base that makes for a ton of demand for US dollars.

      • I wonder if you added the GDP of all the countries that use the US dollar to a modified Debt/GDP ratio and Deficit/GDP ratio, what we would come up with.

    • Can anyone out there put their finger on which logical fallacy this is. It’s something like “putting the cart before the horse” or maybe “making a circular argument” or something…

      It’s like he’s assuming A, so therefore A. (or something like that)

      • 1) Lowering the reward for holding fiat assets (plus giving them “legal tender” status) increases V(elocity).

        2) Increase in V tends to cause additional increase in V.

        3) High quantity of M tends to cause increase in V.

        Conclusion) High quantity of money and liquidating US debt causes V to expand at such an exponential rate as to create hyperinflation.

        Something like that?

        Not entirely untrue, though not taking into consideration all sorts of other considerations of the nature of the private sector.

      • Robert Rice says:

        I’ve noted a number of his errors, from informal fallacies (e.g. his red herring fixation on the historical record, etc.) to a belief in false premises (e.g. inflation is not the inherent effect of money creation, etc.). As far as your concern over a formal fallacy–which argument of his specifically do you have in mind which you are concerned suffers from this? I can tell you whether there is a problem with the argument’s form from there.

        • Robert,

          Thanks for responding to my question about which fallacy. I’m really not sure which part of his argument I was talking about. I guess what I am feeling is that Vince is setting up the scenario (or definiing his evidence) in such a way that supports his conclusion.

          Meaning: his conclusion is a foregone conclusion becasue of the way he explains the supporting evdence (regardless of inaccuracies, etc). Maybe that’s not a specific logical fallacy.

  37. Dan M.
    But you have to get us to a point where “peoples’ savings is dropping in value FAST.” You haven’t gotten us there yet…
    […]
    I think this all comes down to us being the world’s reserve currency, […] as we almost should be considering other country’s GDP in our “debt-to-GDP ratio,” as their economies are really included in the activity and savings base that makes for a ton of demand for US dollars.

    If hyperinflation happens it is because of positive feedback. Look at the following URL for some of the feedback issues. These can start out slow and pick up speed over time. We might already be in some of these.
    http://pair.offshore.ai/38yearcycle/#hyperinflationfeedback

    I like the argument that we should include other countries GDPs in the debt to GDP ration. It makes sense. Certainly for countries that peg to the dollar or that use the dollar. Where I am in the Caribbean we have an “East Caribbean Dollar” that is pegged to the dollar. As long as oil is priced in dollars there will be lots of demand for dollars even outside the US economy. It is certainly different having the word reserve currency.

    My prediction of hyperinflation for the US dollar is with much less certainty than my assertion that MMR is wrong when it claims that monetization is not inflationary.

    • Pierce Inverarity says:

      “It is certainly different having the word reserve currency.” False. See Japan, the last 30 years.

    • VC,

      I don’t think MMR/MMT says that monetization can’t be inflationary, but simply that it’s very unlikely to drive inflation and is only a small contributor to velocity, especially in today’s environment.

  38. Robert Rice
    And btw, I already answered how the government could use the money to fund the deficit. Increase taxes. I’m not sure what’s difficult to understand here.

    So you are going to increase taxes on bond holders and take half of the $10 trillion that is owed to bond holders so you have an extra $5 trillion?

    • Robert Rice says:

      Which as I noted last night means a net increase of NFAs into the economy of 1.7 trillion per year over your three year horizon. This is a little over 10% of GDP. Do you think that is a sufficient quantity of money in an underproducing, underemployed economy to create hyperinflation? There’s no way, particularly when you factor in what will happen to lending in your scenario with the skyrocketing interest rates.

      And to be clear I don’t think we’d need to raise taxes on just bondholders.

  39. I like the view that the government can print all the currency it wants so we can reason as if they burned any taxes collected. Am I the only one that thinks the same logic should be used on bonds so that we can a consistent view?

    • I think you just might be…. here’s why that’s not the right view.

      When taxes are paid by the end of the year, people don’t look at the money they’ve put into taxes and say, “well now I can use this amount at a later time.”

      They have no purchasing power based on the taxes they paid. They can’t make any choices as a result of those taxes regarding consumption. They’re no richer for it, nor do they feel like they are.

      However, when someone buys a bonds, they’re choosing to save it and look at it and count it as part of their balance sheet. This savings in uber-safe money-like assets (even if it were in corporate bonds, or stocks) will change their purchasing power. This will affect their financial balance sheet. They may not be able to actually spend the bonds at the grocery store, but if our world ever got so weird that peoples’ liquidity was actually being disrupted by having too many bonds and not enough cash, the markets would adjust.

      In fact, watch Heat or Die Hard and you’ll notice that Bonds & money are really quite interchangable.

      So there are huge differences there. In one instance, financial assets disappear. In another, they remain on our balance sheet, and affect our future purchasing decisions.

      To build on my previous example, if the treasury initiated 1 year treasury bonds in the amount of $20,000 for every individual in the country, we wouldn’t see zero increased demand until a year from now, and then see hyperinflation… we’d likely see the inflation pretty quickly. Why? Balance sheets, not liquidity (or some ancient version of that word) really drive our decisions.

      In fact, If every household (not person) were sent a check and/or T-Bills of $20,000, creating $2.3 trillion in additional national debt, I don’t think that’d be the worst thing that could happen…. and I don’t think there’d be much of a difference in our purchasing habits depending on whether it was the bonds or the money.

  40. Dan M.
    I think you just might be…. here’s why that’s not the right view.
    When taxes are paid by the end of the year, people don’t look at the money they’ve put into taxes and say, “well now I can use this amount at a later time.”
    They have no purchasing power based on the taxes they paid. They can’t make any choices as a result of those taxes regarding consumption. They’re no richer for it, nor do they feel like they are.

    I understand that bonds are different than taxes. But I still think we can reason about them my way better.

    Imagine that when the government gets a bond it burns the money and issues a post-dated stimulus check. These stimulus checks will be a bit like money but not exactly. The closer in the date the more like money. When the date comes up on the stimulus check the person can get regular money.

    How would it be “wrong” to think about it my way? It seems more consistent or “in the spirit” of how MMT/MMR think about taxes. It also seems easier to understand reality correctly when thinking about it this way. In the same way that “the purpose of taxes is to control inflation” becomes clear when you think “the government could burn the tax money”. If you think about bonds this way it becomes clear they help control inflation.

    • I see what you’re saying, Vince, but I think it gives you the entirely wrong image of what it will do to the economy. Simply put, financial balance sheets drive habits much more than the legal tender status of those items, especially when we’re simply talking cash vs gov’t bonds.

      This is why it’s important to not visualize it as you do… simply put, things called “financial assets,” and their make-up on our balance sheets, drive our wealth/decisions MUCH more than what we may or may not agree should be referred to as “money” on those balance sheets.

      Does that make sense?

      • First, let me say thanks for all the time you have put into this. It has been very interesting.

        I feel like MMR is trying to have it both ways on bonds. First, they will say bonds don’t fund the government. Then they will say, you can’t think of them as burning the money they get from selling bonds. Well, this seems a contradiction. So I don’t feel happy with the MMR answer at the moment.

        I think you must have a consistent world view for it to make sense and be able to predict the right results. I think it is reasonable to view bonds and taxes as funding the government and printing money as the source of inflation. I also think it is reasonable to view the government as having an unlimited ability to print currency and only needing taxes and bonds to control inflation.

        But I don’t believe that bonds are just something the government came up with so that people would have a safe place to save money or that bonds have no impact on inflation. There is lots of experimental evidence that does not fit with that view.

        • Vince, I’m confused about this statement: “But I don’t believe that bonds are just something the government came up with so that people would have a safe place to save money or that bonds have no impact on inflation.”

          I don’t think anyone is arging that the reason the U.S.Gov “came up” with bonds is so that people have a safe place to save. A more accurate way to say it is the U.S.Gov responds to the non-government sector’s desire to save by offering bonds.

          For example, imagine hypothetically if no one desired to save in financial assets. Then there would the U.S.Gov would see no “buyer” when it tried to sell bonds.

          Also, issuing bonds (I think) began in a monetary regime where borrowing money was necessary in order for the U.S.Gov to spend (beyond tax revenue). It’s the transition from that monetary regime to fiat currency that has changed the “nature” or “purpose” of bond sales. But nevertheless, in both situations, the U.S.Gov could not have issued bonds unless the non-government sector had a desire to save. Therefore, the desire to save must come first. Right?

          As for bonds effect on demand-pull inflation, it seems you are ‘sort of’ correct… in that any time money is not spent into the economy it has an anti-inflationary effect.

  41. JK
    I don’t think anyone is arging that the reason the U.S.Gov “came up” with bonds is so that people have a safe place to save. A more accurate way to say it is the U.S.Gov responds to the non-government sector’s desire to save by offering bonds.
    […] Therefore, the desire to save must come first. Right?

    Don’t really see much difference. I don’t buy the idea that bonds do nothing for the government/demand/inflation and are just satisfying peoples desire to save.

    People were saving long before there were central banks or government bonds. Government bonds are not required for people to save.

  42. Robert Rice
    You are not representing your argument correctly. This isn’t a question of real versus imagined as you suggest. Your argument is:
    P: If it hasn’t occurred, it won’t/can’t occur.
    P: It hasn’t occurred.
    C: Therefore it won’t/can’t occur.
    And I’m rejecting your first premise–it is false–while asserting the second is irrelevant. Whether it has or hasn’t occurred previously is an interesting historical footnote, it is not however a litmus test for a sound argument. An argument is sound if it is valid and has true premises. You’ve failed to point out invalidity or false premises in my arguments. Whether what I’m proposing has occurred historically is interesting trivia and nothing more.
    And this idea that it hasn’t occurred therefore it won’t or can’t occur is self-refuting. The writing of this very claim at some point in the past was a new event demonstrating events which haven’t occurred previously do occur.
    If the first premise above were true, nothing would have ever occurred. Quite obviously events occur. To avoid this, you would have to believe in some kind of infinite regress with no beginning where all current events are merely reoccurances of past ones. Certainly nothing new under the sun would have ever occurred. But new events have and do regularly occur, agreed? Where does the saying, “There’s a first time for everything,” originate if not from an observation that new events occur?
    Focus on the validity of the arguments and the truth value of the premises, not on the historical footnote.

    I am not sure which comment you are responding to. Are you saying that even though nobody else has ever been able to monetize a large debt without getting inflation “there is a first time for everything” and maybe the USA will be able to?

  43. Dan M.
    I don’t think MMR/MMT says that monetization can’t be inflationary, but simply that it’s very unlikely to drive inflation and is only a small contributor to velocity, especially in today’s environment.

    There is another thread with the title “Does Anyone Actually Know What MMT is?”. I think MMR suffers from some of the same problem. I think it would be nice if there were a sort of “party platform” or detailed FAQ. From this you could have threads of debates linked to or hanging off of parts of that sort of like a FAQ. And from time to time maybe the platform changes if the consensus changes.

    As I understand most MMR people think, like MMT, that “bonds are money” and so making new money to buy bonds, which from the publics view is converting bonds to money, or monetization, does nothing. If this is not true I would be happy to hear it. :-)

    I think the truth is a bit more fuzzy than “bonds are money” or “bonds are not money”. There is sort of a sliding scale of “moneyness”. I think that the view of bonds as a “post dated check” that will turn into money is good. The shorter the time you have to wait till it turns to money the more it already acts like money. I think this is a clean and accurate way to think about it. The average person can relate to this and understand it. It seems clear that a check that is payable tomorrow is very much like money and one that is payable 30 years off is much less so (given the uncertainty about interest and inflation rates over such a long time). And in this view this all seems so clear.

    • Dan M. says:

      Vince,

      We may be converging here… I like your term “moneyness.” I don’t like the term post-dated check, though, because that implies a lak of purchasing power until */**/****.

      That said, a post-dated check actually is a good point in some ways. Putting aside legal tender laws for a second (which I think there is a general lack of understanding of by Keynesians & austrians alike), could you go buy a car with a post-dated check written to you by the government of the US? I think you could. If not, probably more out of the confusion of the finance department as to how to handle it :).

      So we agree on the sliding scale of moneyness… but keep in mind, in a world of 1’s and 0’s, a LOT of things act as money nowadays. If some tech giant wanted to buy your startup business from you, it’s likely they’d use a stock swap. I also wouldn’t be surprised, although conveninence of dollars makes it somewhat pointless, if at some point you could buy everyday goods using any type of common financial asset. Why couldn’t you use your S&P 500 stock index fund to buy groceries… just have your credit card manage the details of the transaction. It’s messy for a host of reasons, (taxes, the need for the grocery store to manage a portfolio of money they receive, etc), but in a modern economy it could probably be managed.

      I’d also add, lastly, that short-term treasuries (which make up the bulk of our debt), are about as close to pure money on the “moneyness” scale as you can get. That, and I think you still need to focus more on financial balance sheets, which I tend to think drive our decisions much more than where on the “moneyness” scale our financial assets lie.

  44. Dan M.
    So we agree on the sliding scale of moneyness…

    A sliding scale means some things are not exactly like money. So if the Fed makes some new cash (100% money) and buys up a 30 year bond (our least moneyness bond) then things have changed some. And if things have changed some it could be inflationary. I have yet to see a study of historical monetizations that concludes monetization is not inflationary.

    As for most of the government bonds being short term, that seems to be typical right before hyperinflation. :-) It makes it easier to have a sudden flood of 100% money.

    • Vince,

      MMT/MMR doesn’t state that the changing of the “moneyness” on someone’s financial balance sheet can’t be inflationary, but simply that it’s only one small consideration.

      The reason we talk about balance sheets so much is because there are liabilities on those balance sheets (mortgages, student loans, etc) that have to be serviced by both our work and the assets on our balance sheets. Can you visualize this for me? A bunch of assets on a balance sheet, varying from pure money to kinda money to not money… and a corresponding bunch of liabilities, that need to be serviced by our jobs and our assets just mentioned.

      When our liabilities are super small, we might be inclined to care quite a little bit about the “moneyness” of our balance sheets, and therefore changing our bonds to money might matter somewhat to us and get us putting our money to work by buying or investing… but when our liabilities overhang our assets, we don’t care about moneyness, we care about the equity balance and debt service ratio. This is what keeps most Americans up at night… the 3 months of emergency fund they have, two kids going to college, and a job they might lose. What’s important is that our balance sheets are too WEAK, and we need more dollars to service them. If we have a liability overhang AND we think we might lose our job or already have, then we DEFINITELY don’t care about the “moneyness” of these assets, because we NEED these to pay our debt overhang.. in fact, in times like this, we actually value moneyness, because then there’s no question as to its liquidity… just in case the bank doesn’t want to take our 3 shares of Apple stock as a mortgage payment :).

      It’s MUCH MUCH more about balance sheets than it is about “moneyness.” Once you visualize that the way I do (assuming I’m correct, which I think I am), I think it will click.

  45. Dan M.
    […] but when our liabilities overhang our assets, we don’t care about moneyness, we care about the equity balance and debt service ratio. This is what keeps most Americans up at night… the 3 months of emergency fund they have, two kids going to college, and a job they might lose. What’s important is that our balance sheets are too WEAK, and we need more dollars to service them. If we have a liability overhang AND we think we might lose our job or already have, then we DEFINITELY don’t care about the “moneyness” of these assets, because we NEED these to pay our debt overhang.. in fact, in times like this, we actually value moneyness, […]

    In this situation when your 3 month bond comes due, instead of buying another that yields 0.05% you just keep the cash. In this situation where money is tight it is often the case that as soon as money comes in you pay it out to some outstanding bill. The velocity of money goes up. When you are tight for money you don’t put your money in bonds but get out of bonds. Note that as Germany went into hyperinflation most everyone seemed to think they needed more money.

    As you go into hyperinflation people become poor. A 30 year bond becomes worthless. Most financial assets become worth far less (at first even stocks and bonds because interest rates are so high). It seems like you think people need to be rich to have hyperinflation but in real terms they always seem to be poor in hyperinflation. Their balance sheets get wiped out. Prices go up far faster than their income. They don’t have enough cash to live like they used to.

    • Dan M. says:

      Vince,

      That “bill” that came due that I was speaking of was a debt. I don’t think the velocity of money is considered increasing as financial assets are traded for other financial assets (or used to pay down financial liabilities)… I’m quite sure it only applies to dollars being used to purchase consumption & investment. Our bills that DO represent velocity (cell phone, cable, even food, etc) don’t seem to be having any production constraints… i get ad’s for them to supply me more all the time. Our nation is able to provide what people demand, and we’re still under capacity.

      The rest of your post is just explaining how hyperinflation is hard. I’m sure it is. I get that. What we’ve been trying to show you over and over again is that it’s a mess of circumstances that combine and compound to make hyperinflation such a mess, very few of which even come close to applying to the U.S.

      I don’t know how many other ways I can say it… REAL problems cause hyperinflation… not some magical debt/GDP threshhold. It takes a imperfect storm of production collapse, money-printing, corrupt government, foreign obligations, and societal breakdown. Only one of those is happening, and not that much faster than we sell our currency to foreigners. You haven’t shown us an example of currency mismanagement without those other factors resulting in hyperinflation.

  46. Dan M.
    I don’t know how many other ways I can say it… REAL problems cause hyperinflation… not some magical debt/GDP threshhold. It takes a imperfect storm of production collapse, money-printing, corrupt government, foreign obligations, and societal breakdown. Only one of those is happening, and not that much faster than we sell our currency to foreigners. You haven’t shown us an example of currency mismanagement without those other factors resulting in hyperinflation.

    I think we are repeating now, so maybe it is time to stop. I think hyperinflation is correlated with all those problems and that the US will get them if/when it gets hyperinflation. But to predict hyperinflation the debt/GDP and defict/spending ratios seem the best way I know of. How would you know if the level of corruption in the US is getting to danger levels? Does our oil use count as a foreign obligation? All the military bases that pay for all kinds of local support, is that a foreign obligation? We have the money-printing. In hind sight these problems will be clear. There will always be these problems in hyperinflation. So how could your theory be falsified? How can you predict anything? My math for hyperinflation is far more scientific than what you have.

    • One more thought. I can find hyperinflations without war, and some without corruption, and some without regime change, and some without foreign debt (at least till after hyperinflation started), and some without any other particular problems that MMR claim cause hyperinflation before it started. However, they always have the ability to print their own money, large debt (lots short term), and large deficit before hyperinflation can start. Think about that. To me it makes it look like the other things are not the key, but that printing, debt, and deficit are. Back when people used gold and silver coins as money there were wars, and regime changes, and foreign debts, but not hyperinflation.

      If Spain or Greece leaves the Euro and starts printing money they would probably be ready to start hyperinflation right away. All they are missing at the moment is the ability to print their own money.