LateMechanic
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User ID: 1841
LateMechanic
1d ago
If thats why currency is debt
I'm just showing that you can google 'why is cash a liability of the central bank' and get people offering different ways of trying to explain it, if you're confused to the point of asking 'what's stopping them from saying all yuan are their liabilities'.
In my view as I've written, it's just following just the normal IOU/credit/banking logic, but the only thing special here at the 'top' of the money hierarchy is that it's not promising to pay/convert into anything else -- it's just abstract credit. And the reason why anyone treats that credit as valuable is because we're also simultaneously in debt to the issuer (we owe abstract value to the government in tax payments in this case).
It sounds like youre now suggesting something about inflation as the criterion.
That's what I think I've been saying from the start, so I'm sorry if I didn't make it more clear in this chain of replies. Inflation is the constraint on making the deficit too large, providing more savings than people want in aggregate, the excess value of which gets burned off. So that is a discussion about 'real' desired monetary wealth and inflation being self-correction mechanism, which I'm sure we hit at the top of this chain. The evidence of pushing against this constraint is seeing it happen.
Is accelerating inflation the right criterion and old economists where just too worried about going over, or do you object to that criterion as well?
The old orthodox approach was to think you mainly use monetary policy and the interest rate to deal with everything. So they are trying to be vigilant about when inflation is around the corner, and think (thought? maybe it's more up in the air in the last year with countries starting to question this and try the other way around) that raising the interest rate causes unemployment, which is used to curb inflation.
In terms of accelerating inflation, that could just mean the inflation rate going up slightly, which is probably all you'd see from real demand-pull inflation. The real worry that panics people is a spiral where somehow it just keeps accelerating. But you could really only get this if you keep pushing hard with ever-increasing amounts of spending in the face of higher prices, such as having too much government spending indexed to CPI. Or indeed, raising the interest rate, which pays people money just for already having money, which is likely why raising the interest rate is actually not a good tool for fighting inflation in reality. They are probably mostly scarred from the experience in the 70s, without distinguishing between demand-pull and cost-push inflation (unemployment won't stop inflation if it's caused by an oil shortage, etc.).
What do you think of NGDP targeting?
It always seemed goofy, still based on the same assumption the central bankers are wizards that can dial inflation up or down at will. Monetary policy just isn't that powerful, which people would understand if they actually learned the balance sheet assets/liabilities accounting and the plumbing of various operations, instead of thinking there's one special thing called "money" like the textbook said, which can slot into hand-drawn supply & demand toy model charts. That stuff just appears to be brain-breaking.
People rightly want a plausible model for "observations in the real world" before making them loadbearing.
This is all an explanation of how it all already works. It's already loadbearing. Did anyone think the US made it hundreds of years with the debt climbing into the millions, then billions, then tens of trillions by listening to people suggesting that in the long run, 'rational' actors know that the budget will have to be balanced, and thus save all their money for paying judgement day taxes when the long run finally ends?
Occasionally the people freaking out about large numbers actually got their way and reduced the debt significantly, causing our country's only depressions every single time they did it (which also ends up re-exploding the deficit & debt anyway to recover).
precisely what keeps critics of mainstream economics outside the mainstream
Luckily for us all, they usually bring in bankers to run things in government. When they do tap academic economists like bernanke, they have to learn everything on the job, and end up later on trying to get the word out about how things really work.
So the MMTers are often quoting and collaborating with past fed chairs and treasury secretaries, and communicate very easily with the various hedge funders like McCulley & Dalio, and just anyone in finance. They only feud with and can't break through to economists, who have a turf to defend unrelated to accuracy of thought.
The fact that they historically descend from IOUs and there are some conventions left over from that time does not tell us "what it is".
Here's a chicago fed piece that tries to describe it one way, if you like this "But currency is a liability to the central bank that issues it—a promise to stand behind the currency’s value in the future.".
It's just easiest for all the accounting and understanding, to see it as a bearer physical receipt version of the general electronic account credit (rather than the other way around, seeing the electronic reserve balances as promises to pay the physical version). Just all as types of credit from the central bank, which no longer promise redemption into anything, other than abstract value that is accepted by the government for relief from taxes/fees/fines/tariffs/etc.
I agree it's possible that you could do the accounting in other ways, and in fact I think maybe coinage in the US is in a weird spot like that, technically (like they are a liability of the treasury instead of the fed, or even that the treasury doesn't recognize them as a balance sheet liability maybe).
Again, what actual reality stops the fed from listing all yuan as its liabilities?
I'm not really sure what that would mean. Without it actually being a real liability, you could just say it is and that their balance sheet is in a massive capital loss in a fake way?
Technically, what actually stops that in the real world is that what the Fed can do is precisely limited by what congress has allowed in the Federal Reserve Act. But yeah congress amends that plenty throughout history.
Someone gives me 100 gold, and I commit to giving him back 104 gold in a year.
OK yeah I guess that's a gold bond or practically commodity-futures trading. If writing that "IOU 104 gold at x date" note enables any extra normal spending that you wouldn't have otherwise done, that spending would have some inflationary pressure on prices of things you buy. Because again it's the spending which is the relevant thing.
I asked about this because before you suggested employment as an indicator for the right deficit. Do you have any suggestion for something that directly tells me when the appetite for monetary saving is satiated?
It's something you observe after the fact. I think in the original transcript post I made at the top of this chain, mosler called it 'you count the heads of the people in the unemployment line', and you also see what is happening with the price level week by week, month by month, seeing if it starts ticking up.
The mainstream econ version of this, at least 20+ years ago, was called NAIRU: the non-accelerating inflation rate of unemployment. The level of unemployment below which any extra pushing just gives inflation. But they were treating it in a very strange way, trying to assume and make predictions about it ahead of time "maybe the nairu is now 5 or 6 instead of 7, can we allow unemployment to keep getting lower before we jump in and cool things off?". That posture is only explained if you think you're going to accidentally tip into a spiral which is hard to escape from (which was never borne out).
There's multiple ways to count unemployment, but the basic headline unemployment rate can definitely get down to 2-3% with no inflation, it seems from maybe the last 50-100 years. It's a bit hard to say because policymakers have usually been so cautious that we barely have any experience with demand-pull inflation (usually there's some type of cost-push supply side explanation for inflation). Probably the best evidence would be re-examining the '60s and what mainstream keynesians found trying to push for full employment.
Im very curious what an economics looks like where you avoid these indefinite future end arguments generally, rather than just in this one context.
I suppose it just looks more like just looking at the real world. As they say, the long run never really gets here, we are always in a series of short runs. The actual concrete accounting, logic, and plumbing seems much more useful to nail down and understand first, before starting to build more & more elaborate models on various assumptions. I bet it would probably be a fun job to make DSGE models and papers about theoretical risk-adjustments if you can find someone to pay for them, coming up with new tricks and techniques and assumptions. But I'm not too impressed with the real-world understandings & predictions of most equilibrium thinking, whether in econ or finance. I liked this Keynes quote, compared to Barro-style ricardian equivalence type stuff:
In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
LateMechanic
3d ago
Yeah I think that's a basic different political difference among people who basically know how things work.
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Some people have a fear that if you tell policymakers the truth about how money and government finance work, they will spend without limit, on dumber & dumber things, until we reach ruination. As Paul Samuelson put it, the 'superstition that the budget must be balanced' may be a useful bulwark, just like old-fashioned religion used myths to scare people into behaving civilized.
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Others have a fear that if you don't tell policymakers the truth about how money and government finance work, you will get increasing amounts of those who start panicking and despairing about things that aren't actually problems (like: "well, it is a big number", or thinking we're on the hook to china or stealing from our grandchildren), and that they will eventually start blowing up the system and destroying the country's economic prosperity for no reason in the worst own-goal ever.
I can appreciate the worry in the first impulse to some extent. Certainly during the uncovering of the USAID stuff, that feels like vindication for people with this worry. So I definitely agree that some smart self-imposed constraints are warranted, like the fact that congress has to make and agree to a formal budget (rather than just running the whole government as a USAID style slush fund).
But I think our experience is that most people really hate inflation. So telling policymakers that the true constraint on overspending is just inflation does not likely end up with them overspending with inflation-indexed UBI of $100k, or removing taxes entirely, or whatever.
So on balance I'm more worried about people despairing about the deficit & debt out of ignorance and thinking 'those sound like negative things, I know how my own personal finances work'. It leads to all kinds of pointless stress, doomerism, making goofy political moves, and maybe eventually serious economic limitations that run counter to building the most prosperous society we can.
I believe that MMT provides the perfect framework to justify irresponsible fiscal policy.
The view is that irresponsible fiscal policy is running too small of a deficit and causing part of the population to languish in unemployment, or too large of a deficit and pointlessly inflating away the value of a dollar. And that other common definitions of fiscal responsibility are based on either misunderstanding the system, or intentional deception to tie the hands of untrusted officials.
MMT was ultimately a project to bring back some knowledge that was practically lost over the generations, which helps solve the cognitive dissonance of 'why does the system keep running seemingly fine, isn't it all going wrong and about to collapse?'
So I'm basically of the opinion that people mostly got macroeconomic management down through the 20th century, flawed people as they might be. And in this quarter-century, the US has done the best by far. So I'm signing up on the side of trying to calm down the doomsayers and suggest a reminder that those fears of impending doom were even stronger before, constantly throughout each generation, but maybe stick with 'nothing ever happens' for your own wellbeing until you're sure you're not solving your cognitive dissonance the wrong way.
LateMechanic
3d ago
You should be more charitable than this. How do you think the level of reserves changes over time, simply from the payment of interest on reserves? How do they go down then? You can check the NY Fed for this; there is also data.
The level of reserves definitely changes over time, and they can buy & sell at will. But that's irrelevant to the interest rate maintenance after 2008, because the system is absolutely flooded with excess reserves. You just linked to the OMO page where they said it:
Before the global financial crisis, the Federal Reserve used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate--the interest rate at which depository institutions lend reserve balances to other depository institutions overnight--around the target established by the FOMC.
The Federal Reserve's approach to the implementation of monetary policy has evolved considerably since the financial crisis, and particularly so since late 2008
The old system was that they had to mop up any excess reserves to keep them at 0, using OMOs, or else commercial banks would have a race to the bottom of trying to lend them to each other accepting lower & lower rates, and the central bank wouldn't maintain their target rate.
The new system is that they swapped billions/trillions of treasury securities into excess reserves, and then just directly pay the policy interest rate on those reserve balances. As of 2006, they were already planning on making this change to the interest rate maintenance regime in 2011 (because it's a much better system and makes everything easier), but moved it up to 2008 during the crisis to have the better tools at that time.
The currency is infinitely elastic: always more available to be created at a given price (at commercial banks and up at the central bank). These are simply expanding balance sheets of credit-debt relationships, rather than a relatively fixed quantity of things. When people still have the 'money as a thing' mindset, they get hopelessly confused in the modern financial reality, trying to track nominal & real stocks of money and switching between a dozen different monetary aggregates, trying to make any sense of it in the face of QE & such. Chosen nominal rates, floating quantity stock, dynamic real price level not in anyone's direct control.
The point is that the amount of money in nominal terms is not economically relevant. (If you search for the "most valuable currencies," you will encounter articles like this one in Forbes that are completely useless). The economically relevant quantity is the "real value" of the stock of money or the market(!) value of money in terms of other goods and services.
OK yeah the concept of inflation being "what one dollar buys", whereas a different concept is "what all the dollars buy". But this isn't like some kind of main policy concern where everyone is trying to rank highly on that kind of list, with Kuwait currently winning. Countries are trying to run their economies well, aiming for a balance between low unemployment and low inflation. The currency is merely a tool, and outside of any exchange pegs or various temporary gold standards, they aren't backed by anything. They're valuable because each country taxes its citizens and only accepts their own currency in payment.
As a follow-up point, I mentioned that if you want to increase the real value of the total stock of money, you need more backing.
That might be a "sufficient but not necessary" kind of point. The price level is totally dynamic so you could get deflation out of nowhere just from the "animal spirits" changing and everyone trying to save monetarily, increasing the real value of money. Or you can keep the economy running and extremely productive and end up with the money stock more valuable even with some inflation, being nominally larger. You can implement policies that incentivize saving for retirement in regular bank account balances and move the needle quite a bit.
Now maybe we could announce that we were foolish not to "back" the currency with anything of value in the central bank, and that we're reimplementing a gold standard, going back to the wisdom of the 19th century. And it could be sufficient to get people to immediately value money slightly more in comparison to stocks or something. But certainly not necessary.
So money is just a security, a very special one for sure, so the same ideas of 'backing' for stocks and bonds apply to it.
I don't know, looking up convience yield briefly, it doesn't appear to have anything to do with currency. It kind of seems like getting tied in knots without realizing the basic chartalist logic about taxes being the driver. Meanwhile none of that suggested anything about the subject of backing.
I was referring to episodes like the ones explored in The Monetary and Fiscal History of Latin America. I might be able to understand your argument better if you tell me how it is consistent with these episodes.
Wow yeah that is a pretty big set of examples. The entire late 20th century history of a ton of different developing nations with all kinds of various macroeconomic paths pursued. I mean, multiple countries have literally switched on & off of simply using USD as their currency. I have no expertise to weigh in very deeply, but these aren't exactly examples of well-run macroeconomies just getting tripped up.
I think the original point of contention was about "the ability to repay" government debt. Where the relevant context was the US, but generally countries that have their own floating currency. In this context, government debt is just money & currency in a different form, and it just rolls over indefinitely, so there's no "repayment" really. As for the 'inflation = default basically' angle, the US offers some limited inflation-indexed securities as a nice thing for people who want it, but otherwise makes absolutely no promise of bonds/reserves/notes/coins holding their value.
LateMechanic
3d ago
Im not entirely on board with treating a simple dollar bill as an IOU. [...] is not a financial instrument
It's a bit strange to think about, without being redeemable for gold or anything, but that is what it is. Cash notes are financial liabilities of the central bank on their balance sheet: https://www.federalreserve.gov/monetarypolicy/bst_frliabilities.htm
The UK pound paper notes even still literally say they are promissory IOUs on them, with the queen or king announcing "I promise to pay the bearer on demand the sum of five pounds". You can't redeem that value in the form of anything other than another one, but yeah it's still an IOU which exists simultaneously on the issuer's balance sheet as a liability and on the holder's balance sheet as an asset. You're holding paper evidence of the government's debt relationship to you.
Other question: If the government borrowed in a foreign currency or gold rather than dollars, would that be inflationary?
If by borrowing in a foreign currency you mean they create an IOU promising to pay (for example) a billion yen in the future, and swapped that with some bank like the IMF for actual yen notes or credit which they then spend: I guess it would be potentially inflationary to that other currency. What adds inflationary pressure is any actual spending. I can't think of what borrowing in gold would mean.
I also notice that you never say whether somethings is in nominal or real terms, whats up with that?
Well everything is just nominal in reality and in accounting. Anyone can always inflation-adjust or gdp-adjust any particular numbers when they feel it's relevant to some particular analysis, like doing comparisons over time or across countries, etc.
First, I dont think this leads to full employment necessarily.
Yeah I mean just increasing the deficit on any random spending or tax cuts will probably juice the economy up to a certain point like 1-3% unemployment, but it would take something more targeted to try to even go beyond that, somehow minimizing transitory/frictional unemployment, without generating inflation. Can depend on how strict you want to be about the term full employment.
Second, even if savings increase over the long term, there will be fluctuations. If a lot of people suddenly want to spend money that youve already spent for them, what happens?
Definitely, it fluctuates even daily. By the nature of having decent "automatic stabilizer" fiscal policies, people suddenly choosing to spend down their savings would result in tax payments going up, safety net spending going down, and thus automatically shrinking the government deficit (maybe even driving it into surplus).
Last, people want savings, but why would they want dollar denominated savings over non-monetary assets? If people just buy index instead of sitting on money, does that already do what you want to do?
Yeah personally I have almost no appetite for monetary savings, I dump it all into non-bond index funds. I'm not sure what you mean about what I want, but yeah the analysis would be that incentivizing saving in other assets like stocks & real estate surely ends up meaning the government won't end up running as large of a deficit (no need to counter savings leakages). Again that's mostly value-free, so I don't call it good or bad.
Some people have complaints about asset price inflation, where it's not that the value of money is falling compared to goods & services, but where we're all plowing endlessly into the stock market like a clown car, bidding it up constantly. But I'm not sure about that.
LateMechanic
4d ago
conventional theory is that borrowing is less inflationary than money printing. Do you disagree?
Definitely, primarily because the separation is just incoherent.
In the conventional view, you call central bank reserve account balances "money" which is evidence of "printing", while you call treasury t-bills "debt" which are evidence of "borrowing". But they are both are just government liabilities which promise to pay nothing in redemption other than other government liabilities, and which pay the policy rate of interest. To make it funnier, these are literally both types of accounts that the central bank runs on their books, because the Fed does the banking on behalf of the Treasury. You can call them checking & savings accounts at the government bank, although they pay the same interest, and you can freely swap between these accounts (you're never 'stuck' holding them). To call only one of these accounts "money" takes a special kind of incoherence.
Physical paper/coin money cash is just a bearer receipt version of the electronic reserves. That's the only government money that doesn't pay interest now, as a tiny fraction of the money supply, held for some types of convenience.
The MMT people often try to be more precise and avoid the word 'money' because it can lead to confusion sometimes, but I just plow ahead and risk it. The clear definition of money from what we use now and even throughout history is "transferable credit". So we can just talk about money as IOUs. Someone issued a financial liability, which someone else gets to hold as their financial asset. A bank balance is your valuable asset because it's the bank's debt. A reserve account balance is the bank's valuable asset because it's the central bank's debt. A $5 bill is your asset because it's the central bank's liability. Always credit-debt relationships, the issuer owing the holder.
So I'm perfectly happy to call the outstanding reserve balances part of the "government debt", just like I call treasury bonds/bills/securities "money". These are all both money and debt.
So issuing/printing new reserves or issuing/printing new t-bills, which are nearly perfect equivalents, no, they would not have different inflationary impacts. The size of the government deficit is the size of the amount of money being printed, and it always has been.
Many mainstream economists like Summers & Krugman got to this a bit late, in the 2010's, when they reconsidered that 0% government debt instruments were essentially 'money'. So they started reconsidering what they thought they knew about 'monetizing the government debt' and QE, etc. I'm not sure if they ever caught up to the fact that in 2008, central banks switched to paying interest on reserves directly, making 'money' look just like securities even when we're not in a 0% interest environment.
So far, youve shown that just printing the deficit gets you the same effect as cutting expenditures to balance the budget, with some inflation along the way.
But in the previous model, there is no ongoing deficit in the equilibrium youre inflating towards.
I'm sorry I couldn't really parse what you were saying in these 2 paragraphs. That balancing the budget was the same as running a deficit, or somehow it had the same outcome in a particular way?
And in what way is the equilibrium of your strategy better than just spending enough for full employment, and raising taxes to balance the budget?
Well if anyone is ever saving money, then by identity someone else must be dis-saving an equivalent amount (running down prior savings, or just issuing debt). Because it's all zero sum. In aggregate, what we find is that people like to accumulate monetary savings over time (even with populations that aren't growing I think). So unless your hypothetical has some way to stop that, that saving is a leakage in aggregate demand which will not let you get to full employment without the government being in deficit to supply the desired savings. A government balanced budget means they are draining out exactly as much money as they're injecting in to the economy.
LateMechanic
4d ago
You'll have to forgive me that I'm frustrated that every single time I try to discuss this topic with MMT advocates they do this same exact thing of just trying to discuss the accounting instead of what the policy actually results it empirically. It's about as enjoyable as trying to get Austrians who rant about praxeology to acknowledge empirical evidence.
The point is specifically about how the real-world accounting works for banking and government finance. MMT isn't a policy, it's describing the system as it already works today and how it's worked throughout history. And monetary policy is barely relevant to it. If assets and liabilities and balance sheets are not your interest, but you feel obligated to engage for ideological reasons with your own hypotheticals about radically changing the macroeconomic management from what's been working because you have your own prediction of impending disaster, I can indeed imagine that's frustrating.
MMT "advocates" are trying to explain how it works and why it has continued working despite people having your same fears for centuries, so that you can join us in sleeping soundly at night instead of despairing. FCFromSSC is not my 'opponent' in the slightest.
Who said anything about involuntary?
Well anyone can voluntarily do anything stupid. There can be a wide range of competence in macroeconomic management. The unsustainable argument is only strong if you think the system is headed toward involuntary crisis.
What leads you to that choice?
Voluntarily choosing to default on your own currency debt? Incompetence, not understanding the accounting, malice or kingly inconsideration maybe. In the US, the existence of the debt ceiling law for example is partially incompetence/misunderstanding, but mostly kept around as a political weapon to use against the opposing party in power.
Since both of these create massive political instability, good government requires avoiding the circumstances that create this dilemma, and thus a limit on non-productive spending.
OK solid. That's what I opened with in the very first post: good macroeconomic governance entails not causing runaway accelerating inflation by making the deficit too large. And we judge by outcomes, we don't get sidetracked counting the number of digits or commas.
LateMechanic
4d ago
when weighed against "prosperity beyond what anyone can imagine" they dont weigh especially strongly. Could you at least link it? MMT has lots of cranks that will be dismissed as not representative.
OK so you were asking "why inflation is bad" from an MMT perspective? I don't know that there is any unique take, it's not part of it. MMT is a description of how money, banking, and government finance actually works.
If you wanted a pitch about how inflation 'isn't really bad', then sorry, that's not part of it. I added my own spin about how inflation is obviously a dynamic self-correcting mechanism for too much savings, and that the only way you get accidental persistent or accelerating inflation rather than it being a relief valve is when too much spending is indexed to the price level (maybe some part of the problem they had in the '60s).
Mosler's "prosperity beyond what anyone can imagine" is referring to perpetual full employment in a productive capitalist system. That was in 2012 where they were looking at the massive "output gap" of where GDP was going before the recession and how far it got knocked off trend by heavy unemployment -- just a complete waste of human potential.
I also have 'some' income outside taking on debt. I can commit to spending part of it on buying back my own IOUs/debt service in the future. Indeed, my nominal income increases with inflation and economic growth, so this is in many ways like a relative tax. Also assume I live forever.
The tax isn't just an income flow. It's forcing everyone into a debt relationship with you, where if they don't pay, you will put them in jail using force. In the past, authorities may have used fees, fines, tithes, sanctions, whatever. If in your hypothetical, you could live forever, and you could force people into paying some amount of your own IOUs back to you or else you will credibly use some level of violence against them, then certainly they will find out what they have to do to get enough of your IOUs, and maybe even some extra if they want to save some or trade them with others.
Now can I blow up my debt to infinity? Propably not; propably there is some mechanism tieing the debt amount to the size of the tax base/income, but what?
It's just the amount that people are willing to have as savings. The government's debt is the non-government's net money supply ('net', because the private sector can also expand the money supply with their own debt & credit, but that all nets to 0 as a whole).
If you incentivize savings, like with pension funds or whatever, maybe your country will have a higher aggregate savings desire, and your government debt will have to be larger in order to maintain full employment. If you instead have a culture and policy where people live comfortable retirements without requiring any personal savings somehow, then maybe there would be extremely low government debt. If you're Japan, and the population has a very low participation in the stock market after the '90s, then the government debt & deficit are likely going to be huge to satisfy the desire to save money. New money being pumped in will quickly fall out of circulation and end up inert in someone's retirement savings account.
The government doesn't need to care about the size or whether it's growing or falling. That's all value-free, neither good nor bad. It's not like the desire is to see how large the debt can grow. Private savings are a 'leakage' from the economy, like net imports. The government has to step in to make up for that if you want to stop the paradox of thrift and keep the productive economy running at full effectiveness.
Then unlimited real growth of debt would mean unlimited real growth of GDP, or an unlimited willingness of people to sit on cash and never spend it. Neither is realistic.
Yep. That's why once you understand how it works, the basic outlook changes from thinking about "sound finance" (thinking there's a budget constraint that has to be balanced either short term or over some longer cycle, and thinking that monetary policy of tweaking the interest rate and composition of savings is the main policy tool) to "functional finance" (seeing unemployment as evidence of too small of a deficit, and demand-pull inflation as evidence of too large of a deficit, where fiscal policy of taxing and spending is the main policy tool and monetary policy not mattering much).
LateMechanic
5d ago
Im asking for some kind of real economic cost; "Its annoying when the prices are different than I remember" doesnt count, no.
You could look it up, it's not my argument. It's good enough for me that most people hate it, so let's avoid it. It's fun when nickels are worth picking up off the ground and can get you a coke.
If you dont pay enough interest, people will stop lending you money.
When you have your own currency and central bank, people don't 'lend' you your own money at all. You can print up IOUs and tell people they pay 0% or 150%, up to you if you want to subsidize savings.
Well, you said that the difference between me and the state is that the state can tax. If it doesnt actually need to do that, then whats the difference?
I said the government levies 'some' taxes every year, reoccurring indefinitely, broadly on everyone. That provides a perpetual anchor value for the government's debt, understood universally, even though the amount outstanding can continue to rise (if people want to keep accumulating it for the future, for a rainy day, to pass down to their kids, whatever).
That doesn't imply anything about somehow taxing it all back and paying it all off or whatever, at some unspecified jubilee judgement day where we have to unwind everything.
LateMechanic
6d ago
Now at 3.5% they're acting like it's crisis mode on the other side (too far above 2%), so they're probably shying away from argentina style for now.
But yeah with Japan's public debt size, they were definitely confusing the brake pedal for the gas pedal in the 2000s, and should have checked out what a 2% rate hike would have done as stimulus. (or just cut taxes)
LateMechanic
6d ago
Sure, they set a price but how is that implemented? It is implemented by changes in the quantities. Yes, the rule says adjust the quantity as much as needed to get to the price. But to do that quantity adjustment sometimes you need to reduce the quantity in the market (OMOs sometimes require 'buying back' money) and for that you need assets that the market values.
This was the old rate maintenance regime, but unfortunately you're almost 20 years out of date here. The way they implement the policy rate is by simply paying that chosen rate of interest on reserves directly. They absolutely flooded the banking system with excess reserves, in order for the interbank lending rates to get pinned to that same 'floor' rate. For those entities holding reserves which aren't legally allowed to be paid interest directly, the Fed pays them interest anyway, using overnight reverse-repos that you mentioned before.
I believe basically all central banks switched to this approach rather than OMOs with 0 excess reserves (it's way easier this way).
And with this regime, there's basically no difference to the banks whether they're holding reserves or short-term securities, so the Fed's balance sheet composition and size can be changed at will.
The amount of money in real terms that a central bank can supply is limited by the assets that they hold because otherwise the bank cannot maintain the real value of money in the face of demand shocks.
I can't exactly tell, but it kind of sounds like you're describing some kind of conception of banking like they're storing real objects. Like you 'deposit' some gold bars and your jewelry, and they issue you an account balance and/or a paper money receipt for it? In that kind of idea, I can see how you would be talking about the bank's assets and how they 'back' the value of the credit money. And that kind of story is like where the 'fractional reserve -> money multiplier' ideas came from.
That just has nothing to do with how modern banking actually works (nor even really past banking apparently, the goldsmith idea was basically always a misconception or story for convenience). The Fed's balance sheet assets are almost entirely just treasury securities, which they 'bought' by creating their own liabilities (reserves). It was just a pure balance sheet expansion, which is how modern banks work. Maybe the terminology here is that banks in the real world use 'finance' model of banking while some dated textbooks discuss hypothetical 'intermediation' models.
Backing need not be about redemption. Think of stock buybacks, stocks are backed by the companies cash flows. You can't show up with one share and demand a payment from the company, but there is an implicit expected future value of the stock and the buybacks help maintain it.
You're basically just referring to things having value for various reasons. 'Backing' means there's a subject behind it, guaranteeing a value (or trying to). It's just going to serve to confuse thinking to bring out 'backed by' when it's not an actual strong case. Does a government want their currency to be more valuable than less, like a company wants their stock price to be higher rather than lower (because look at our great cash flow this quarter)? Yeah, but those are categorically different than an IOU that promises some redemption value like gold or PS5s. Now if a company has a standing offer to buy back any existing stock at some price, that is more of a real backing.
Your argument proves too much: if it were true, there would be no issues with the monetary crises in the late 20th century. Taxes are set in nominal terms, but they are set with a delay so the government will lose in real terms with inflation (after we are all bumped up to higher brackets).
I didn't follow this part, can you mention the crises you're referring to?
LateMechanic
6d ago
So you're just going to repeat back MMT to me as if I haven't read Tcherneva and never heard of chartalism?
On the other side of the dunning-kruger scale, this is loudly announcing 'I looked up the wikipedia page'. And I'm not just repeating MMT back to you. I answered your precise first question by showing you how the actual government finance operations work in the US, with a link to an official testimony people find a bit shocking and interesting if they know anything about what's being discussed, and you thought that sounded like monopoly money that 'nobody gives a shit about'. You can't really be helped if you don't know the first thing about any of this.
Come on, at least engage with the idea of a debt crisis.
all I see from MMT proponents is a total faith in the impossibility of default or hyperinflation.
Involuntary default in your own currency that you issue? Definitely impossible. Inflation? I already started with that covered as the real constraint.
What if I start paying your military men in the new harder currency to loot your country?
Getting your state looted by foreign creditors is a real thing that really happens to people.
Ok, we're nearly up to countries can go to war with each other. Can you try to tie this back in to the fiscal responsibility of US republicans & democrats? Do you have any prediction about the timeline of the US becoming Russia?
LateMechanic
6d ago
It surely depends on the government debt to gdp ratio. But yeah interest spending is government spending like any other, so turning on the fire hose and blasting people with free money is probably more stimulative than high borrowing costs are constrictive. You would have to think the propensity to spend interest income is near 0 to think otherwise. I don't know if that's the same reasoning as neo-fisherians use, or what erdogan is working from.
I'm not up to date with milei either, though I like his chainsaw schtick. If it was his policy to cut rates, the 10-year charts are pretty striking: interest rate, inflation rate. The last I had heard was years ago, that argentina was probably accidentally making their inflation worse by following the orthodox advice of raising rates. It wasn't until yesterday that I looked this up and saw the cut rates preceding the inflation drop.
LateMechanic
6d ago
Ill note that you still havent explained why too much inflation is bad, or how we would know what "too much" is.
I assume you're not asking for the various downsides of inflation in general and why people find it annoying when it's above some small amount like 1-2%? My original statement was that people should have the properly oriented mindset, where the problem of 'too much government debt' is along the lines of 'too much of a good thing'. The 'good thing' here is the money in the private sector, not inflation, if that was the confusion. This is all in contrast to most peoples' gut notion that "deficit" and "debt" sound negative and bad and worth minimizing on their own.
I agree that the taxes give value to the IOUs, but I dont think the made up unit gives you all that much long-term
You don't think the US making up their own 'dollar' unit of measurement is too important? You must be on some kind of galactic time scale here for what long term means. This is surely one of the most important things about being a sovereign nation, creating and issuing your own currency.
Unless you can somehow inflate above expectations indefinitely, in the long term you need to tax back what you borrowed plus interest in real terms.
Again, maybe I'm not thinking long term enough. But in the US, we went into millions, then billions, now trillions. Should we find the tens of trillions a special number, such that we wouldn't expect to see quadrillions? When and why would they ever need to 'tax back' this amount? The IOUs just roll over indefinitely.
There is no reason to borrow unless your position as the government gives you investment opportunities above market returns, youd just pay interest for no good reason.
Yeah once you recognize that all money is just transferable credit, you will notice that there is basically no economic difference between central bank reserves and treasury securities. So rather than one being 'money' and the other being 'borrowing', they are actually not 'borrowing' at all. They are just creating money in different forms. This fact has dawned on people like Larry Summers a decade after central bank reserves started paying interest just like treasury securities.
As for paying interest, it's purely a policy choice to pay anything other than 0% on any of these IOUs. It's a government subsidy to savers: they will give you more money for having money. There are various macroeconomic effects for any chosen rate. Currently the policymakers in charge think choosing to pay a higher interest rate is on balance more constrictive than stimulative, and think that low rates are on balance more stimulative.
LateMechanic
6d ago
My thinking is not confused because I admit that money and treasuries are (consolidated) government liabilities, both of which need backing and ability to repay. People get confused with “fiat money” and think that it doesn’t require any backing. But the value of fiat money today depends on the expectations of its value in the future; that value depends on the demand and supply of money then.
I don't know what you would mean by "backing" in this context. The treasury issues IOUs that pay interest (bonds/bills/etc), and they make those interest payments by issuing more of the same IOUs in the future: they indefinitely roll over. The central bank issues IOUs that pay interest (reserves), and they make those interest payments by issuing more of the same IOUs in the future: it indefinitely rolls over. There is no promised future real 'value', it is what it is, and if there's inflation, so be it (other than the inflation-indexed bonds). And the only thing any of these government IOUs can be redeemed for when returned to their issuer is tax relief (or you can freely swap them for other different types of government IOUs).
If the federal reserve has no assets, then it cannot react to a lower demand for money by withdrawing the money from circulation so the value of money would be lower.
They are the monopoly issuer of the currency, and thus can either control price or quantity. There was a bit of a monetarist experiment with Volcker where they tried to control quantity and let price float, but that just caused the price (interest rate) to keep ratcheting up, because commercial bank lending creates deposits endogenously. They have since recognized that they just have to fix price and let quantity float, to run the system properly. So they just set the interest rate and do not care about 'demand for money' - it's infinitely available at some price. We're simply talking about numbers in account balances.
Finally, repayment in real terms is the concern. Inflation is default.
Whose concern? The government doesn't care. And no one else's opinion matters. They are not beholden to the market. If inflation ticks up, that is definitely not the same as defaulting on the debt. We still need the government's IOUs to pay taxes, so they will perpetually be valuable to that extent.
No serious monetary economist will ever tell you that a central bank has no meaningful budget constraint
Not sure what you mean by a central bank budget constraint. They have various expenses each year, but any preparation of a formal budget is to make their case to congress that they're behaving well and shouldn't be slapped on the wrist. It's not an economic constraint. They tend to end up in profit every year and just dump that amount into the treasury's account.
The usefulness of money allows you to get some value without any backing (for a different example of that look at Bitcoin).
Bitcoin has no issuer offering a redemption value, and thus is a commodity rather than money. As an economic instrument, the fair value is $0. Any valuation above that might be a small amount for the utility of making transactions (would work if each btc were 1 cent or something), and otherwise just speculative (don't get caught holding the bag).
If you're saying that bitcoin has no 'backing', but US dollars have 'backing', maybe you're using that term for what I'm calling IOU 'redemption'? (returning an IOU to its issuer, to get what is 'owed')
LateMechanic
6d ago
In which area do you see them being hampered by the public debt? The usual story goes that ever since the 90s crash, Japan had mostly been unable to generate any inflation, in their constant fight against dipping into deflation. The only exception being the 2022 inflation where basically every currency got the same tick up.
As far as how this coincides with the story about government debt corresponding to monetary savings desire, a plausible story is that the Japanese people don't trust the stock market after the crash, and thus most of their asset allocation is monetary (cash/bonds), especially as an aging society trying to save for retirement. So for the japanese government to really juice the economy with stimulus, it would have to try a lot harder with a huge deficit (instead they often balked and pulled back multiple times over the decades).
LateMechanic
6d ago
What if people refuse to use your currency to trade goods and services? What if they tell you to fuck off when you ask them to pay you your own fun bucks?
This entire scenario is specifically about what happens when your power to enforce the privilege of exchanging debt for ressources ends.
Money is debt. So that would be inflation, which was definitely covered from the start. That is absolutely the relevant constraint on government deficit spending.
As far as the exchange rate goes: in the very worst case scenario of your exchange rate suffering, you can always at least import as much as you export. That's true whether you even have your own currency or not. But if you have a currency that foreigners are willing to save in (a world 'reserve currency', which basically all currencies are to different degrees), that just allows you the luxury of importing even more than you export (not necessary, but can be nice, although then your exporter businesses might start bitching about your country's 'trade deficit', so it's not all roses).
What happens when US treasuries are no longer viewed as the most risk free investment vehicle in the world and are replaced by something else and demand craters?
As I tried explaining procedurally above, it doesn't matter a single iota whether there's any market demand for treasuries. That's the charade part of it. The government effectively is just printing money as they deficit spend, and they always have been. They print the money, they set how much interest money pays (if any), and we have to get the government's money regardless of anything, in order to pay taxes.
If the king wants something done, he levies a tax on the subjects. Then he prints up some tally sticks, and pays them out to people to do the thing. Then they pay their tax, and he burns the tally sticks. Same with colonial american paper money: levy a tax, print up some stacks, get the work done, then shred the money as it gets paid back in taxes.
LateMechanic
6d ago
Well the private sector definitely creates money and real wealth as well, so it's not a competition for any kind of limited quantity of financing. But it does so pro-cyclically: when times are good there's lending & investments everywhere, but everyone clams up when times are bad. The government can be the counter-cyclical engine, stopping the paradox of thrift.
If you would have otherwise had high unemployment, then creating money and paying those unemployed people to dig holes is at least better than letting them atrophy away, in terms of "damage done", because at least they go on to spend that money and generate more demand. But yeah it would always be a better idea to put people to work generating some kind of base-level valued output (goods/services). Ideally the government catches people at the bottom unemployment end, and they can as quickly as possible transfer back into the private sector to make more money and do something valuable.
LateMechanic
6d ago
Germany lost a war and a ton of productive capacity, and had to pay war debts in foreign currencies. The other one about 'productive' was Zimbabwe destroying their own real economy with land reforms.
Don't remember what Argentina's deal was, didn't they keep borrowing in USD and do multiple voluntary peso defaults? Or recently they mistakenly were causing inflation by increasing their interest rate which was supposed to fight inflation, until they finally realized that and cut the interest rate which cut the inflation proportionally? Getting the gas & brake pedals confused is a rough time.
Anyway none of these were some policymakers learning the forbidden dark arts of 'oh the only constraint on fiat currency deficit spending is inflation, not insolvency? That doesn't sound bad, let's spend with abandon!'
I thought the 70s stagflation had put to rest the silly notion that high inflation equals low unemployment.
Well the premise would be: if prices are going up because 'people just have so much money they can't spend it fast enough', businesses would be booming and would be desperate to hire anyone that's available. But yeah, the '70s shows that if inflation is 'cost-push', ie caused on the supply side by something like an oil embargo out of nowhere, then it doesn't matter if you try to wreck the economy (as volcker tried), those prices may not be tamed by more unemployment slack. May need to deregulate natural gas in that kind of instance, to get costs back down.
LateMechanic
6d ago
"It says here in this history book that luckily, the good guys have won every single time. What are the odds?”
Not sure you're following the point, that was saying that we have a goofy system precisely because different people have been trading off who wins & loses all the time. Especially in the 19th century the winners didn't exactly know what they were doing (constant boom & bust cycles with many severe depressions).
"Primary dealers" of monopoly money can surely not fail in delivering it to the US government, but how exactly does that translate into food rations for GI?
The government prints up some IOUs called treasury securities, and swaps them for some other government IOUs called central bank reserves, in a primary dealer auction completely unencumbered by "people choosing to buy debt". Then they use those IOUs (widely called 'money') to spend and/or give to people out in the economy, who are willing to trade goods & services for those IOUs. These government IOUs are valuable because they're the only way to settle your taxes that the government declared that you owe.
If that sounded like gibberish to you, well I already said most people don't understand the monetary system and never learned about it. If you think there's "a" world reserve currency conferring special status to a single country, that does explain where you're at, but the basic logic I just laid out also applies to other countries that issue their own currency.
LateMechanic
6d ago
The point of me saying this was that in that situation you should put more effort on justification.
Yep fair enough, my initial 2nd paragraph was kind of declaring things outside the point of the rest of it. That was trying to punch up what people might 'know' which I think are incontrovertible, without going into subjective policy implications.
None of this describes an actual problem with inflation. It says that inflation will automatically regulate away any excess borrowings. Why then not set taxes to 0, and just let the inflation run its course?
Having some amount of taxes is what gives the currency an initial anchor value. Those taxes being levied broadly and reoccurring every year is what makes the money universally accepted and used even in the private economy. The currency is an IOU where the only thing 'owed' upon redemption is tax relief. If you levy no taxes, then inflation definitely will regulate the value automatically to the desired savings amount of 0 (give or take some inertia).
Is there any reason this is unique to the government? Or is my deficit also literally the same thing as rest-of-the-economy surplus? Because if it is, then it seems noone else should have objections to me borrowing indefinitely, either - it just makes you better of!
The only thing unique to government is the ability to levy taxes (backed up by force). That's what allows them to indefinitely print up IOUs that promise to pay nothing but an abstract amount of value in a unit of measurement they make up, and people will still line up to earn those IOUs (working in the army or wherever).
The generalized logic is: "you will always value your creditor's own debt". Because you can cancel out the debts with each other. The government can decree that it's a universal creditor to everyone (everyone owes taxes, abstract amounts of value payable in nothing). Thus enabling it to actually simultaneously be a universal debtor to everyone (issuing IOUs far exceeding the tax liabilities, if people are willing to save some for a rainy day).
You can write any number of IOUs that say "I owe the bearer of this note 1 apple", and use that new money to pay for things. Maybe only people in your neighborhood will accept it (also helps if they know you have an apple tree in your yard, and that there aren't too many outstanding notes to enable a run on your apples). If you write "I owe the bearer of this note $1", then some people (particularly banks) may accept it as valuable if they trust your creditworthiness. Your deficit is indeed definitely everyone else's surplus, if splitting the economy into those 2 sectors is useful to any analysis. So we (in the non-Lykurg sector of the economy) do benefit. The only problem is you run out of creditworthiness before we get very stimulated.
Why would they not want more? You demand that I explain why we would ever want non-government surplus to be less, but now you just assert that it will be the case.
Well, would you be happy holding millions/billions in checking/saving/bond accounts, or would you be tempted at some point to start buying stocks, yachts, and islands instead? It seems that most people tend to have savings targets to hit, after which they feel more free to spend any excess income. And their preferred asset allocation of savings maxes out at some desired amount of monetary savings.
But indeed, the government deficit could certainly be eleventy zillion dollars, if it were to end up in someone's account that has an infinite savings desire who wouldn't touch it. In the MV=PQ identity, that would be money increasing but velocity falling off a cliff, causing no effect on output or price level.
And I didn't say that there's no reason to want to shrink the government deficit, just that it does take an explanation. I could say that I do want to shrink the non-government surplus in hypothetical situations, if we're having obnoxious levels of inflation, maybe caused by too much government spending being indexed against the price level (causing a positive feedback loop that prevents automatic stabilization).
Finally, we indeed have basically never had much demand-pull inflation in the modern era of democracies with proper central banks using fiat currency (since the early 20th century at least). The bouts of inflation are usually better explained as cost-push, often from energy price shocks. The central bankers take credit for being wizards and steering the economies well, but it's probably those fiscal automatic stabilizers doing the work.
LateMechanic
6d ago
Yet issuing more Treasuries and then wasting the proceeds is not sustainable.
But what are the 'proceeds' in your formulation? They issue a government liability that pays the policy rate, swap it for a different government liability that pays the policy rate (central bank reserves), and then spend it. There is no difference between reserves and treasuries, so calling one 'money' and calling the other 'debt that requires backing and an ability to repay' is only serving to confuse your thinking.
It's akin to printing up a new $5 bill, then exchanging it for quarters because that's what the arcade takes. No more or less money in any form. They can print as many central bank reserves or treasury securities as they want, so 'repayment' is a non issue. Inflation is the only relevant concern.
LateMechanic
6d ago
What will inevitably happen is that some lefty will use this bullshit to do what they always do and spend with abandon until collapse.
That seems to be the driving fear, although we've never seen it happen in a productive democracy. In the real world, regular people seem to hate inflation so much that we almost always err on the other side: too much unemployment from taxes being too high.
It will not be like greece, who was bailed out by the nordic german taxpayer (while being decried as evil austerites), more like venezuela.
It would definitely be weird if the US ended up looking like a country that gave up their own currency or a country that relied on a single export while borrowing in a foreign currency they didn't control.
LateMechanic
6d ago
Private savings don't have to be in T-Bills. To the extent the market is flooded with them, they crowd out private investment and savings in private instruments.
There's no crowding out there, it's just a price effect. The government sets the risk-free rate, and others price risk premiums on top of that. Finance is infinitely available: price not quantity.
So even if some amount of T-bill generation each year is actually good, it would be best achieved by funding courts and police and setting taxes near to zero.
That's exactly right, that's why we fight (politically) for our preferred outcomes. It's just a mistake to say the deficit has anything to do with the size of government or what we prioritize doing in the public sector. The size of the government deficit & debt have to do with the savings desires of the populace. So it's just the wrong target to look at.
What people thought was their well-defined understanding of government money & debt led to stuff like completely being blindsided by QE not affecting inflation. Monetization, printing the obligations! Or to the japanese bonds widowmaker trades, where people just couldn't believe the interest rate could go down with that much debt. Or indeed, the '90s Italian bonds case where Mosler made his first hedge fund hundreds of millions, taking a free 2% spread by betting against people who thought Italy had default risks for their own currency debt.
Hence the content of my very first post to fcfromssc. If anyone feels like the way the system has been run for over a century is irresponsible and must be leading to unavoidable disaster, let them try to prove that case that we have cause to worry! Let's see the hard-nosed analysis about this supposed disaster, from people who understand the zero-sum nature of financial accounting and who can also properly explain everything else going on now and in history in whatever framework they find illuminating.
Don't sign up politically for a sucker play based on feelings & fear, and don't expect your opponents to do so either. All the evidence shows that economic disaster follows shrinking the debt, while good times follow growing the debt. For those who don't want to learn the plumbing, at least consider going with 'nothing ever happens' and take up the grill pill, for your own sanity. Elon wouldn't have crashed out if he realized the deficit is a tool which would be useful to his own goals of becoming multi-planetary, instead of assuming it's an existential threat because we're 'broke' or something.
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