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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).
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.
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.
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.
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:
If thats why currency is debt, then youre including that promise into "what currency is". You would then have to, whenever you try to use the fact that "currency is debt" in your reasoning, also show that the promise wont be violated, else the argument is invalid. And you of course cant already use "currency is debt" to show that something will work out without breaking the promise, because thats a regress.
Thats fine, if you can tell at the end of each period whether you went over in the previous. It sounds like youre now suggesting something about inflation as the criterion. 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? What do you think of NGDP targeting?
With private debt, the strategy of taking on more and more debt looks great right until noone is willing to lend you more. People rightly want a plausible model for "observations in the real world" before making them loadbearing. The temptation to ignore limitations based on "real world observation" is omnipresent in economics ("Most people are willing on the margin to help a bit without direct visible compensation, therefore communism"), and using theoretical problems as a setup to ignore theory is precisely what keeps critics of mainstream economics outside the mainstream.
Even without an end-date, economics always depends on expectations about the future. Trying to understand whats happening in the here and now before you get to those doesnt work.
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).
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.
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.).
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.
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).
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 problem is that the particular nature of this debt to the issuer is a free variable, so a thing defined from it is a function rather than an object. "Regular" debt is like this in the sense the the government can technically just decide to default, or print its exact obligations which is basically the same, but there is a well-defined understanding of what normally happens to debt that there isnt so much with money, and the bit that there is changes based on what monetary theory the state adopts.
What youve said at the start was that inflation is a reason you might stop spending more because you dont like inflation. What were discussing now is that the benefits of more spending stop when you start to increase inflation. Thats consistent with the old comments, but a significant and to me much more useful addition.
How it works so far may be consistent with your theory, but also others where there is still cause to worry.
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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