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PaperclipPerfector  1mo ago (text post)   31377 thread views

Culture War Roundup for the week of June 2, 2025

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This was the old rate maintenance regime, but unfortunately you're almost 20 years out of date here.

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 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.

Perhaps I wasn't clear enough. 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. You can do this without 'backing' as in Bitcoin or monetary models where money is inherently useless and the aggregate nominal stock of money is held constant; so it is a separate concept from backing. 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.

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.

Here we have a strong disagreement. In my view (which I believe is in line with theoretical models of money), a key component of money is simply asset pricing with a 'convenience yield' or non-dividend uses. Of course, there is more to it, but understanding that gets you a long way. The 'convenience yield', which is the spread in return between money and the risk-adjusted market portfolio, is like a (rental) price for money (in real terms) and it is lower when the central bank supplies more money (in real terms) as the central bank simply works its way down a demand curve. 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.

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?

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.

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.

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